ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Kelvin Co had opening inventory of 3,000 units and closing inventory of 1,000 units. Fixed production overhead is absorbed at $8 per unit. Marginal costing profit was $90,000. What was the absorption costing profit?
Absorption costing profit was $74,000. Inventory fell by 2,000 units, so $16,000 of fixed overhead brought forward in opening inventory is charged to this period under absorption costing, reducing profit below the marginal costing figure of $90,000.
- A$74,000Correct
- B$106,000
- C$66,000
- D$90,000
Explanation
Inventory fell by 2,000 units. Absorption costing releases $8 x 2,000 = $16,000 of previously deferred fixed overhead into the period, so its profit is lower. $90,000 - $16,000 = $74,000. $106,000 reverses the sign.
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