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CMA Intermediate · Cost Accounting · Marginal Costing

When production exceeds sales in a period and the fixed overhead rate is unchanged, which statement about profits is correct?

Absorption costing profit is higher when production exceeds sales. Stock increases, and absorption costing carries a share of fixed overhead forward in closing stock, charging less to the current period, while marginal costing writes off the entire fixed overhead.

  1. AMarginal costing profit is higher than absorption costing profit
  2. BBoth methods report the same profit
  3. CAbsorption costing profit is higher than marginal costing profitCorrect
  4. DMarginal costing profit equals contribution less variable overhead only

Explanation

If production exceeds sales, closing stock rises. Absorption costing defers part of fixed overhead in closing stock, so less is charged to the period and profit is higher. Marginal costing charges all fixed overhead, giving lower profit.

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