CA Intermediate · Cost and Management Accounting · Marginal Costing
Which statement about marginal costing is correct when production exceeds sales during a period and opening stock is nil?
Absorption costing profit is higher. When production exceeds sales, closing stock rises, and absorption costing includes fixed overhead in that stock, deferring the cost, whereas marginal costing writes off all fixed costs in the period, giving a lower profit.
- AProfit under absorption costing is higher than under marginal costingCorrect
- BProfit under marginal costing is higher than under absorption costing
- CProfit is the same under both methods
- DFixed costs are carried in closing stock under marginal costing
Explanation
Absorption costing carries a share of fixed overhead in closing stock, deferring it to the next period, so current-period profit is higher. Marginal costing charges all fixed cost to the period. The option claiming marginal profit is higher reverses the effect.
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