CAF-5 · Chapter 9 · Question 4 of 10
When a company's production volume exceeds its sales volume during a specific period, how will the net profit compare between the two costing methods?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Absorption costing will report a higher net profit than marginal costing.
Explanation
When production exceeds sales, inventory levels increase. Under absorption costing, a portion of the current period's fixed production overheads is deferred (carried forward) in the closing inventory valuation, reducing the cost of sales and thereby resulting in a higher profit compared to marginal costing.
More Marginal Costing and Absorption Costing MCQs
- Q6A company had an opening inventory of 4,000 units and a closing inventory of 6,000 units. The fixed overhead absorption rate (OAR) is Rs…
- Q7In a marginal costing income statement, what is deducted from Sales Revenue to arrive at the "Contribution Margin"?
- Q8Which of the following situations will require an adjustment for "under or over-absorbed overheads" in the income statement?
- Q9When reconciling marginal costing profit to absorption costing profit, which of the following formulas correctly calculates the difference…
- Q10When comparing absorption costing with marginal costing, under which specific condition will the net profit reported by both methods be…