ExpertHard2 marksMultiple Choice
ACCA · Question 14 · Cost Accounting Techniques
Section A
AppDev Co, a tech startup, produced 5,000 software licenses and sold 4,500 in its first month. Fixed production overheads were $20,000. The company reported a profit of $50,000 using marginal costing. What would the profit be if the company used absorption costing?
Section A
AppDev Co, a tech startup, produced 5,000 software licenses and sold 4,500 in its first month. Fixed production overheads were $20,000. The company reported a profit of $50,000 using marginal costing. What would the profit be if the company used absorption costing?
Answer options:
A.
$48,000
B.
$50,000
C.
$52,000
D.
$70,000
How to approach this question
Calculate the Fixed Overhead Absorption Rate (OAR). Multiply OAR by the change in inventory levels. Add this to marginal profit if inventory increased.
Full Answer
C.$52,000✓ Correct
Fixed OAR = $20,000 / 5,000 units = $4 per unit. Inventory increased by 500 units (5,000 produced - 4,500 sold). Under absorption costing, fixed overheads attached to closing inventory are carried forward. Difference in profit = 500 units * $4 = $2,000. Since inventory increased, absorption profit is higher: $50,000 + $2,000 = $52,000.
Common mistakes
Subtracting the difference instead of adding it.
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