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ACCA Applied Knowledge · Management Accounting · Absorption and marginal costing

Zeta Ltd produced 12,000 units and sold 10,000 units in a period. There were no opening inventories. Fixed production overhead was $60,000 and is absorbed on the basis of units produced. Compared with marginal costing profit, absorption costing profit will be:

Absorption costing profit is $10,000 higher. The fixed overhead rate is $5 per unit, and inventory rose by 2,000 units, so $10,000 of fixed overhead is deferred in closing inventory under absorption costing but charged in full to the period under marginal costing.

  1. A$10,000 higherCorrect
  2. B$10,000 lower
  3. C$12,000 higher
  4. D$2,000 higher

Explanation

Absorption rate = $60,000 / 12,000 = $5 per unit. Inventory increases by 2,000 units, so $10,000 of fixed overhead is carried forward in inventory under absorption costing. Absorption profit is therefore $10,000 higher. The $12,000 figure wrongly uses the closing inventory with a $6 rate.

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