CAF-5 · Chapter 9 · Question 9 of 10
When reconciling marginal costing profit to absorption costing profit, which of the following formulas correctly calculates the difference in profit?
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Reveal answer & explanation
Correct answer: B) (Closing Inventory Units - Opening Inventory Units) × Fixed Overhead Absorption Rate per unit
Explanation
The absolute difference between marginal and absorption profit is solely driven by the amount of fixed overhead trapped in inventory. This is calculated by multiplying the difference in physical inventory units by the standard Fixed Overhead Absorption Rate (OAR) per unit.
More Marginal Costing and Absorption Costing MCQs
- Q1What is the fundamental difference between marginal costing and absorption costing?
- Q2Under a marginal costing system, how are fixed production overheads treated in the financial period they are incurred?
- Q3In an absorption costing income statement, how are variable selling and administration expenses accounted for?
- Q4When a company's production volume exceeds its sales volume during a specific period, how will the net profit compare between the two…
- Q5Which of the following components are included in the valuation of closing inventory under absorption costing?