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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Which statement correctly describes the relationship between absorption and marginal costing profits when production exceeds sales in a period and the fixed overhead absorption rate is unchanged?

Absorption costing profit is higher when production exceeds sales, because inventory increases and part of the fixed production overhead is carried forward in closing inventory valuation. Marginal costing writes off all fixed overhead in the period, so its profit is lower.

  1. AAbsorption costing profit is higher because fixed overhead is carried forward in closing inventoryCorrect
  2. BMarginal costing profit is higher because variable costs are carried forward in inventory
  3. CThe profits are equal because total fixed overhead is the same
  4. DAbsorption costing profit is lower because more overhead is absorbed

Explanation

When production exceeds sales, inventory rises. Absorption costing includes fixed production overhead in inventory valuation, deferring part of the cost to the next period, so profit is higher. Marginal costing charges all fixed overhead to the period.

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