Skip to content

ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Kestrel Ltd produced 12,000 units and sold 10,000 units in a period. There was no opening inventory. Fixed production overhead was $60,000 and the overhead absorption rate was based on actual production of 12,000 units. By how much does absorption costing profit exceed marginal costing profit?

Absorption costing profit is $10,000 higher. The fixed overhead rate is $5 per unit ($60,000 divided by 12,000), and 2,000 units were added to inventory, so $10,000 of fixed overhead is carried forward in inventory instead of being charged to profit.

  1. A$10,000Correct
  2. B$12,000
  3. C$6,000
  4. D$5,000

Explanation

Fixed overhead absorption rate = $60,000 / 12,000 = $5 per unit. Inventory increased by 2,000 units, so profit difference = 2,000 x $5 = $10,000, with absorption profit higher. $12,000 would result from wrongly using the sales units quantity issue in the wrong way, and $6,000 uses $3 per unit, which is not supported by the data.

Did you get it right without looking?

One question tells you little. A timed set on Absorption and marginal costing shows your real accuracy, how long you take and where you lose marks.

Practise Absorption and marginal costingFree diagnostic mock

More Absorption and marginal costing questions