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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Pellam Co budgets to produce 20,000 units with fixed production overhead of $100,000, absorbing on units produced. In the period it produced 18,000 units and sold 19,000 units, with opening inventory of 2,500 units. Actual fixed production overhead was $100,000. Marginal costing profit was $140,000. What was the absorption costing profit?

Absorption costing profit is $135,000. The overhead rate is $5 per unit ($100,000 divided by 20,000 budgeted units). Inventory fell by 1,000 units because sales exceeded production, so $5,000 of previously deferred fixed overhead is charged, reducing profit from $140,000.

  1. A$135,000Correct
  2. B$140,000
  3. C$145,000
  4. D$130,000

Explanation

Rate = $100,000 / 20,000 = $5 per unit. Inventory change = 18,000 - 19,000 = -1,000 units, so absorption profit = $140,000 - (1,000 x $5) = $135,000. The under-absorption is a period cost in absorption costing and does not alter the inventory-based reconciliation. $145,000 gets the sign wrong.

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