ExpertMedium2 marksShort Answer
ACCA · Question 16 · C. Cost accounting techniques
A telecommunications equipment manufacturer reported a profit of $50,000 using marginal costing.
During the period, opening inventory was 500 units and closing inventory was 700 units. The fixed production overhead absorption rate is $15 per unit.
Calculate the profit that would be reported if the company used absorption costing.
(Enter the numeric value only, without commas or currency symbols)
A telecommunications equipment manufacturer reported a profit of $50,000 using marginal costing.
During the period, opening inventory was 500 units and closing inventory was 700 units. The fixed production overhead absorption rate is $15 per unit.
Calculate the profit that would be reported if the company used absorption costing.
(Enter the numeric value only, without commas or currency symbols)
How to approach this question
Use the reconciliation formula: Absorption Profit = Marginal Profit + (Change in Inventory units * Fixed OAR).
Full Answer
Difference in profit = Change in inventory units * Fixed Overhead Absorption Rate (OAR).
Change in inventory = 700 (closing) - 500 (opening) = +200 units (inventory increased).
Profit difference = 200 units * $15 = $3,000.
Because inventory increased, absorption costing defers more fixed costs into inventory, making its profit higher than marginal costing.
Absorption Profit = $50,000 + $3,000 = $53,000.
Common mistakes
Subtracting the $3,000 instead of adding it (resulting in $47,000). Remember: if inventory rises, absorption profit is higher.
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