ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing
Tamsin Ltd had opening inventory of 2,000 units and closing inventory of 5,000 units. Fixed production overhead is absorbed at $6 per unit and production was at normal activity. Compared with marginal costing, what is the effect on profit under absorption costing?
Absorption costing profit is $18,000 higher. Inventory rose by 3,000 units, so 3,000 units at $6 of fixed overhead is carried forward in closing inventory rather than being charged to the period as under marginal costing.
- AProfit is $18,000 higherCorrect
- BProfit is $12,000 higher
- CProfit is $18,000 lower
- DProfit is $30,000 higher
Explanation
Inventory increased by 3,000 units. Absorption costing defers 3,000 x $6 = $18,000 of fixed overhead in closing inventory, so profit is $18,000 higher. $30,000 would wrongly use the total of units in both inventory levels.
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