Skip to content

ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Which statement correctly explains why absorption costing and marginal costing profits differ when production and sales volumes differ?

The profits differ because absorption costing includes a share of fixed production overhead in inventory valuation, deferring it when inventory rises, while marginal costing values inventory at variable cost only and charges all fixed production overhead to the period in which it is incurred.

  1. AAbsorption costing carries part of fixed production overhead in closing inventory valuation, while marginal costing charges all fixed production overhead to the periodCorrect
  2. BMarginal costing includes variable selling costs in inventory, whereas absorption costing excludes them
  3. CAbsorption costing treats fixed production overhead as a period cost, whereas marginal costing treats it as a product cost
  4. DMarginal costing values inventory at selling price less contribution

Explanation

Absorption costing includes a share of fixed production overhead in inventory, deferring it to later periods. Marginal costing values inventory at variable production cost only and writes off fixed overhead in the period. The option reversing these treatments is therefore wrong.

Did you get it right without looking?

One question tells you little. A timed set on Absorption and marginal costing shows your real accuracy, how long you take and where you lose marks.

Practise Absorption and marginal costingFree diagnostic mock

More Absorption and marginal costing questions