ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles
Karo Ltd had opening inventory of 3,000 units and closing inventory of 1,000 units. The fixed overhead absorption rate was $8 per unit in both the opening and closing valuations. Marginal costing profit was $90,000. What was the absorption costing profit?
The absorption costing profit is $74,000. Inventory fell by 2,000 units, so absorption costing charges $16,000 more fixed overhead (2,000 x $8) than was incurred in the period, whereas marginal costing does not. Profit is therefore $16,000 lower than the $90,000 marginal costing profit.
- A$74,000Correct
- B$106,000
- C$90,000
- D$114,000
Explanation
Inventory fell by 2,000 units. Under absorption costing, more fixed overhead is released from opening inventory than is deferred in closing inventory: 2,000 x $8 = $16,000. Absorption profit = $90,000 - $16,000 = $74,000. Adding $16,000 would give $106,000, which has the sign wrong.
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