In a period where opening stocks were 15,000 units and closing stocks were 20,000 units, a firm had a profit of $150,000 using absorption costing.
If the fixed overhead absorption rate were £10 per unit, the profit using marginal costing would be:
a. $90,000
b. $130,000
c. $100,000
d. $110,000
Answer (1)
To calculate the profit using marginal costing, we need to understand how absorption costing and marginal costing differ, particularly in handling fixed overheads. Under absorption costing, fixed manufacturing overheads are spread across units produced and included in the cost of finished goods. In contrast, marginal costing considers these overheads as period costs, only accounting for variable costs in each unit.
The key difference affecting profit lies in how ending inventory values influence profit. By carrying more ending inventory in absorption costing, we defer a portion of fixed overheads into future periods, leading to potentially higher profits.
Let's determine how much of these fixed costs have shifted:
Changes in Inventory Levels :
Opening stock: 15,000 units
Closing stock: 20,000 units
Change in stock = Closing Stock - Opening Stock = 20,000 units - 15,000 units = 5,000 units
Impact of Inventory Change on Profit :
Fixed overhead absorption rate = £10 per unit
Additional units in inventory = 5,000 units
Fixed overheads deferred to the future = 5,000 units \times £10 = £50,000
Under absorption costing, this amount is carried into the inventory, thus increasing the profit. Under marginal costing, it would not be part of inventory and hence profit decreases by this amount.
Calculate the Marginal Costing Profit:
Absorption costing profit = $150,000
Adjusted for additional inventory costs using marginal costing: $150,000 - $50,000 = $100,000
Thus, the profit using marginal costing would be $100,000.
The correct multiple-choice option is c. $100,000 .
