CIMA BA2 · Chapter 4
Absorption and marginal costing MCQs with Answers
8 multiple-choice questions on Absorption and marginal costing for CIMA BA2 Fundamentals of Management Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under marginal costing, how are units of closing inventory of finished goods valued?
- A) At full production cost including fixed production overheads
- B) At total cost including selling and administration costs
- C) At variable production cost only
- D) At selling price less a normal profit margin
Show answer & explanation
Answer: C) At variable production cost only
Marginal costing treats only variable production costs as product costs. Fixed production overheads are treated as period costs and written off in full in the period incurred, so they are not carried forward in inventory.
Question 2
A company with no opening inventory produced 24,000 units and sold 21,000 units. Fixed production overheads are absorbed at $5 per unit. How will the profit reported under absorption costing compare with the profit under marginal costing?
- A) Absorption costing profit will be $15,000 higher
- B) Absorption costing profit will be $15,000 lower
- C) Absorption costing profit will be $105,000 higher
- D) The two profits will be the same
Show answer & explanation
Answer: A) Absorption costing profit will be $15,000 higher
Inventory increases by 24,000 - 21,000 = 3,000 units. Under absorption costing each of these units carries $5 of fixed production overhead into the next period, so 3,000 x $5 = $15,000 less fixed overhead is charged against this period's profit. Absorption costing profit is therefore $15,000 higher.
Question 3
Opening inventory was 3,000 units and closing inventory was 1,800 units. The fixed production overhead absorption rate has been $8 per unit in both periods. Profit for the period under marginal costing was $62,000. What was the profit under absorption costing?
- A) $71,600
- B) $47,600
- C) $52,400
- D) $38,000
Show answer & explanation
Answer: C) $52,400
Inventory fell by 3,000 - 1,800 = 1,200 units. Under absorption costing, fixed overhead brought forward in the opening inventory is released into cost of sales, so absorption profit is lower by 1,200 x $8 = $9,600. Absorption costing profit = $62,000 - $9,600 = $52,400.
Question 4
A company makes one product with the following budgeted data: Selling price $40 per unit Variable production cost $14 per unit Variable selling cost $3 per unit sold Fixed production overheads $180,000 (absorbed on budgeted production of 20,000 units) Fixed administration costs $50,000 In the period, 22,000 units were produced and 19,000 units were sold. There was no opening inventory and all actual costs were as budgeted. What is the profit for the period under absorption costing?
- A) $207,000
- B) $216,000
- C) $234,000
- D) $180,000
Show answer & explanation
Answer: C) $234,000
Absorption rate = $180,000 / 20,000 = $9 per unit, so full production cost = $14 + $9 = $23. Sales $760,000 less cost of sales (19,000 x $23 = $437,000), plus over-absorbed overhead ((22,000 - 20,000) x $9 = $18,000), less variable selling costs (19,000 x $3 = $57,000) and administration $50,000 = $234,000. Check: marginal costing profit is $207,000, and inventory rose by 3,000 units x $9 = $27,000, giving the same $234,000.
Question 5
In marginal costing, what is meant by 'contribution'?
- A) Sales revenue minus all variable costs
- B) Sales revenue minus all production costs
- C) Sales revenue minus fixed costs
- D) Gross profit minus selling costs
Show answer & explanation
Answer: A) Sales revenue minus all variable costs
Contribution is sales revenue less all variable costs (variable production, selling and distribution costs). It is the amount available to contribute first towards fixed costs and then towards profit.
Question 6
Which of the following is an argument in favour of using ABSORPTION costing for inventory valuation?
- A) It avoids the need to apportion and absorb fixed production overheads
- B) It is consistent with the inventory valuation required for external financial reporting under IAS 2 Inventories
- C) Profit cannot be manipulated by changing production levels
- D) It shows contribution clearly, which helps short-term decision making
Show answer & explanation
Answer: B) It is consistent with the inventory valuation required for external financial reporting under IAS 2 Inventories
IAS 2 requires inventories to include a systematic allocation of fixed production overheads, which is what absorption costing does. The other statements are arguments for marginal costing: it avoids arbitrary absorption, its profit is not affected by building inventory, and it highlights contribution.
Question 7
In a period in which the number of units produced is exactly equal to the number of units sold, which statement about reported profit is correct (assuming unit costs are unchanged from the previous period)?
- A) Absorption costing will report the higher profit
- B) Marginal costing will report the higher profit
- C) Absorption costing and marginal costing will report the same profit
- D) The difference will equal the total fixed production overheads for the period
Show answer & explanation
Answer: C) Absorption costing and marginal costing will report the same profit
Differences in profit arise only from the fixed production overhead carried forward in changes in inventory. If production equals sales, inventory does not change, so the fixed overhead charged against profit is the same under both methods and the profits are equal.
Question 8
A product sells for $30 per unit. Variable production cost is $12 per unit and sales commission is 10% of selling price. Fixed costs for the period are $175,000. If 16,000 units are produced and sold, what is the profit for the period under marginal costing?
- A) $65,000
- B) $113,000
- C) $93,800
- D) $240,000
Show answer & explanation
Answer: A) $65,000
Sales commission = 10% x $30 = $3 per unit. Contribution per unit = $30 - $12 - $3 = $15. Total contribution = 16,000 x $15 = $240,000. Profit = $240,000 - $175,000 = $65,000.