Page 193 - F2 - MA Integrated Workbook STUDENT 2018-19

Absorption and marginal costing

(c) The total profit for the period under absorption costing is $2,000

Total unit cost = $(3 + 6 + 2 + 5 + 4) = $20

Total profit per unit = $21 - $20 = $1

$
Gross profit ($1 × 3,000) 3,000
Less under absorption of overheads* (1,000)
––––––
Total profit 2,000
* Overheads have been under-absorbed
$
Overhead absorbed ($4 × 6,000**) 24,000
Overhead incurred 25,000
Under-absorbed overheads 1,000
**6,000 units have been produced Units
Sales 3,000
Opening inventory (1,000)
Closing inventory 4,000
––––––
Production 6,000

(d) Reconciliation
Absorption costing profit 2,000
Change in inventory × fixed overhead absorption rate
(1,000 – 4,000) × $4 (12,000)
––––––
Marginal costing loss (10,000)

Test your understanding 4

A

If the number of units of closing inventory at the end of a period is greater than
at the beginning, marginal costing would give a lower operating profit than
absorption costing.

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