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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Orla Ltd budgets to produce 20,000 units with fixed production overhead of $100,000, absorbed per unit produced. Actual production was 18,000 units, actual sales 17,000 units, and opening inventory was nil. Actual fixed overhead was $100,000. Marginal costing profit was $64,000. What was the absorption costing profit?

Absorption costing profit was $69,000. The budgeted fixed overhead rate is $5 per unit, and inventory increased by 1,000 units, so $5,000 of fixed overhead is deferred in closing inventory, raising absorption profit above the marginal costing profit of $64,000.

  1. A$69,000Correct
  2. B$64,000
  3. C$68,000
  4. D$59,000

Explanation

Rate = $100,000 / 20,000 = $5 per unit. Inventory rose by 1,000 units, so $5,000 of overhead is deferred. Absorption profit = $64,000 + $5,000 = $69,000. The under-absorption of $10,000 is a period charge in absorption costing and does not alter this reconciliation, as it is in the profit already. $68,000 wrongly uses a rate of $5.56 on actual output.

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