ICAEW BIP · Chapter 2 · Question 9 of 12
Stanway Ltd makes one product, which sells for £60. Variable production cost is £22 per unit. Budgeted fixed production overheads are £300,000 and budgeted production is 25,000 units, and overheads are absorbed per unit. Fixed selling costs are £40,000. There was no opening inventory. In the period, 26,000 units were made and 24,000 were sold. Actual fixed production overheads were £305,000. What was the profit under absorption costing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) £591,000
Explanation
Absorption rate = £300,000 / 25,000 = £12 per unit, so full production cost = £22 + £12 = £34. Overheads absorbed = 26,000 x £12 = £312,000, compared with actual overheads of £305,000, so they are over-absorbed by £7,000. Profit = sales £1,440,000 - cost of sales (24,000 x £34) £816,000 + over-absorption £7,000 - fixed selling costs £40,000 = £591,000. The marginal costing profit of £567,000 differs by the 2,000 units added to inventory x £12.
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