CIMA BA2 · Chapter 4 · Question 2 of 8
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?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Absorption costing profit will be $15,000 higher
Explanation
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.
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