ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Orrin Ltd's absorption costing profit for a month was $48,500 and its marginal costing profit was $45,000. Fixed production overhead is absorbed at $5 per unit. Opening inventory was 1,200 units. What was the closing inventory?
Closing inventory was 1,900 units. The $3,500 profit difference divided by the $5 fixed overhead rate gives a 700-unit increase in inventory. Adding this to the opening inventory of 1,200 units gives 1,900 units.
- A1,900 unitsCorrect
- B500 units
- C700 units
- D1,700 units
Explanation
Absorption profit exceeds marginal profit by $3,500, so inventory rose by 3,500 / $5 = 700 units. Closing inventory = 1,200 + 700 = 1,900 units. 700 units is only the change, and 500 units wrongly subtracts the change from opening inventory.
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