ExpertMedium2 marksMultiple Choice
ACCA · Question 12 · Cost accounting techniques
Section A
A public utility company manufacturing solar panels produced 10,000 units but only sold 8,000 units during the period. Fixed production overheads are significant.
How will the profit calculated under absorption costing compare to the profit under marginal costing?
Section A
A public utility company manufacturing solar panels produced 10,000 units but only sold 8,000 units during the period. Fixed production overheads are significant.
How will the profit calculated under absorption costing compare to the profit under marginal costing?
Answer options:
A.
Absorption costing profit will be higher than marginal costing profit.
B.
Marginal costing profit will be higher than absorption costing profit.
C.
Both profits will be exactly the same.
D.
It is impossible to tell without knowing the exact selling price.
How to approach this question
Remember the rule: If Production > Sales, Inventory increases. Absorption costing carries fixed overheads forward in inventory, reducing current period expenses and increasing profit compared to marginal costing.
Full Answer
A.Absorption costing profit will be higher than marginal costing profit.✓ Correct
Under absorption costing, fixed production overheads are absorbed into product costs. When production exceeds sales, closing inventory increases. The fixed overheads attached to the unsold units are carried forward to the next period in the inventory valuation, reducing the cost of sales in the current period and thereby resulting in a higher profit compared to marginal costing (which writes off all fixed overheads as period costs immediately).
Common mistakes
Reversing the rule and thinking marginal costing gives higher profit when inventory rises.
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