Question

MA1

In a period where opening stocks were 15000 units and closing stock 20000.A firm had a profit of $130000 using Absorption costing.if the fixed overhead absorption rate was $8/unit ,the profit using marginal costing would be a) $170000 b) $130000 b) $90000 d) impossible to calculate without having more information available

Answer 1

When inventory is increasing (C/I > O/I), absorption costing has higher profit compared to marginal costing.

In this case, the answer has to be $90,000 as it's the only answer lower than $130,000.

To calculate the profit difference in AC and MC: changes in inventory x FOAR/u.

So, 5,000u x $8 = $40,000.

Inventory increased, AC profit is higher than MC profit, so $130,000 - $40,000 = $90,000.

Answer 2

Marginal profit - opening stock + closing stock = Absorption costing