ACCA MA · Chapter 7
Absorption and marginal costing MCQs with Answers
11 multiple-choice questions on Absorption and marginal costing for ACCA MA Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under marginal costing, how is finished goods inventory valued?
- A) At variable production cost only
- B) At full production cost including fixed production overheads
- C) At total cost including selling and administration costs
- D) At variable production cost plus variable selling costs
Show answer & explanation
Answer: A) At variable production cost only
Marginal costing values inventory at variable (marginal) production cost: direct materials, direct labour, direct expenses and variable production overheads. Fixed production overheads are treated as period costs and written off in full in the period.
Question 2
Finished goods inventory increased by 500 units during a period. The fixed production overhead absorption rate is $8 per unit. How will the profit under absorption costing compare with the profit under marginal costing?
- A) Absorption costing profit will be $4,000 higher
- B) Absorption costing profit will be $4,000 lower
- C) Marginal costing profit will be $8,000 higher
- D) Both methods will report the same profit
Show answer & explanation
Answer: A) Absorption costing profit will be $4,000 higher
When inventory increases, absorption costing carries forward some fixed production overhead in closing inventory, so its profit is higher. Difference = change in inventory units x fixed OAR per unit = 500 x 8 = $4,000.
Question 3
A company's profit for a period under marginal costing was $62,000. Opening inventory was 1,200 units and closing inventory was 900 units. The fixed production overhead absorption rate is $5 per unit. What was the profit under absorption costing?
- A) $60,500
- B) $63,500
- C) $57,500
- D) $66,500
Show answer & explanation
Answer: A) $60,500
Inventory fell by 1,200 - 900 = 300 units. When inventory falls, absorption costing releases fixed overheads from opening inventory into this period's cost of sales, so its profit is lower. Absorption profit = 62,000 - (300 x 5) = $60,500.
Question 4
A product has the following data per unit: selling price $40, direct materials $12, direct labour $8, variable production overhead $3, variable selling cost $2, fixed production overhead $6. What is the contribution per unit?
- A) $17
- B) $15
- C) $9
- D) $11
Show answer & explanation
Answer: B) $15
Contribution = selling price - all variable costs = 40 - (12 + 8 + 3 + 2) = $15. Variable selling costs must be deducted (otherwise the answer is $17), and fixed overheads are not deducted when calculating contribution.
Question 5
Budgeted production was 10,000 units, with budgeted fixed production overheads of $80,000, absorbed per unit. Actual production was 11,000 units and sales were 10,500 units at $50 each. Variable production cost is $30 per unit. Actual fixed production overheads were $82,000, and fixed selling costs were $20,000. There was no opening inventory. What is the profit under absorption costing?
- A) $108,000
- B) $106,000
- C) $118,000
- D) $112,000
Show answer & explanation
Answer: D) $112,000
OAR = 80,000 / 10,000 = $8, so full cost = $38 per unit. Sales 10,500 x 50 = 525,000, less cost of sales 10,500 x 38 = 399,000. Absorbed overheads = 11,000 x 8 = 88,000 against actual 82,000, so overheads are over-absorbed by $6,000 (added to profit). Profit = 525,000 - 399,000 + 6,000 - 20,000 = $112,000. Check: marginal profit = 10,500 x 20 - 82,000 - 20,000 = $108,000, plus the 500-unit inventory increase x $8 = $4,000 gives $112,000.
Question 6
Which of the following is an argument in favour of marginal costing?
- A) It is the method required by IAS 2 Inventories for external reporting
- B) It makes sure that all production costs are recovered in the product cost
- C) It always reports a higher profit than absorption costing
- D) Profit is not affected by changes in inventory levels, because fixed production overheads are not carried forward in inventory
Show answer & explanation
Answer: D) Profit is not affected by changes in inventory levels, because fixed production overheads are not carried forward in inventory
Under marginal costing, fixed production overheads are written off in the period they are incurred, so managers cannot raise reported profit simply by building up inventory. IAS 2 requires absorption costing for external reporting. Which method reports the higher profit depends on whether inventory rises or falls.
Question 7
Which of the following statements about absorption costing is correct?
- A) It is consistent with IAS 2 Inventories, which requires inventory to include a share of production overheads
- B) It treats fixed production overheads as period costs
- C) It values inventory at variable production cost only
- D) It cannot be used together with standard costing
Show answer & explanation
Answer: A) It is consistent with IAS 2 Inventories, which requires inventory to include a share of production overheads
IAS 2 requires inventory to be valued at cost, including a systematic allocation of fixed and variable production overheads based on normal capacity. Absorption costing does this. Treating fixed overheads as period costs is a feature of marginal costing.
Question 8
If there is no opening or closing inventory in a period, how does absorption costing profit compare with marginal costing profit?
- A) Absorption costing profit is higher
- B) Marginal costing profit is higher
- C) The profits are the same
- D) It depends on the size of fixed selling overheads
Show answer & explanation
Answer: C) The profits are the same
The two methods give different profits only because of the fixed production overhead carried in inventory. With no opening or closing inventory, all fixed production overheads are charged in the period under both methods, so the profits are the same.
Question 9
A company produced 8,000 units and sold 7,000 units in its first period. Variable production cost is $14 per unit, and fixed production overheads were $48,000 (equal to budget, which was based on 8,000 units of production). What is the value of closing inventory under absorption costing?
- A) $20,000
- B) $14,000
- C) $20,857
- D) $6,000
Show answer & explanation
Answer: A) $20,000
Fixed OAR = 48,000 / 8,000 = $6 per unit, so full production cost = 14 + 6 = $20 per unit. Closing inventory = 8,000 - 7,000 = 1,000 units x $20 = $20,000. Under marginal costing it would be 1,000 x 14 = $14,000. Using sales volume to calculate the OAR gives the incorrect $20,857.
Question 10
How are fixed production overheads treated under marginal costing?
- A) As part of the cost of each unit produced
- B) As part of the value of closing inventory
- C) As a cost that is spread over the useful life of the product
- D) As a period cost, charged in full against profit in the period in which they are incurred
Show answer & explanation
Answer: D) As a period cost, charged in full against profit in the period in which they are incurred
Marginal costing treats fixed production overheads as period costs. They are deducted in full from total contribution in the period, rather than being absorbed into units and carried forward in inventory.
Question 11
In a period, a company produced 10,000 units. Profit under absorption costing was $45,000 and profit under marginal costing was $51,000. The fixed production overhead absorption rate is $4 per unit, and opening inventory was 2,500 units. How many units were sold in the period?
- A) 8,500 units
- B) 10,000 units
- C) 1,000 units
- D) 11,500 units
Show answer & explanation
Answer: D) 11,500 units
Marginal profit is $6,000 higher, which means inventory must have fallen. Fall in inventory = 6,000 / 4 = 1,500 units, so closing inventory = 2,500 - 1,500 = 1,000 units. Sales = opening inventory + production - closing inventory = 2,500 + 10,000 - 1,000 = 11,500 units.