What is the impact on profit when closing inventory decreases under absorption costing compared to marginal costing?Question 7Answera.Profit fluctuates depending on sales volumeb.Profit is higher under absorption costingc.Profit is lower under absorption costingd.Profit remains the same under both costing methods
Question
What is the impact on profit when closing inventory decreases under absorption costing compared to marginal costing?Question 7Answera.Profit fluctuates depending on sales volumeb.Profit is higher under absorption costingc.Profit is lower under absorption costingd.Profit remains the same under both costing methods
Solution
Under absorption costing, both fixed and variable costs are considered in the cost of production, while under marginal costing, only variable costs are considered.
When closing inventory decreases, it means that more goods have been sold.
Under absorption costing, the cost of goods sold includes both variable and fixed costs, so when more goods are sold, more of the fixed costs are accounted for. This leads to a higher profit compared to marginal costing, where only variable costs are considered.
So, the correct answer is b. Profit is higher under absorption costing.
Similar Questions
Where the fixed overhead rate in both opening and closing inventories is the same, which of the following statements is correct? Group of answer choicesIf inventory remains the same, absorption costing profit will be greater than variable costing profit.None of aboveIf inventory has increased, absorption costing profit will be greater than variable costing profit.If inventory has decreased, absorption costing profit will be greater than variable costing profit.Absorption costing profit is always greater than variable costing profit.
Industrial Dynamics reported a marginal costing profit of $28,000 for the year. During the same period, there was a decrease in inventory of 500 units. The fixed production overhead absorption rate was calculated at $10 per unit. Additionally, variable selling costs amounted to $4,000 and fixed distribution costs totalled $2,000 for the period.Calculate the Absorption Costing Profit.
What is the primary difference between marginal costing and absorption costing?Question 4Answera.Marginal costing considers both variable and fixed costs; absorption costing considers only variable costs.b.Marginal costing is used for external reporting; absorption costing is used for internal decision-making.c.Marginal costing includes fixed production overheads in product costs; absorption costing does not.d.Marginal costing treats fixed production overheads as period costs; absorption costing allocates them to inventory.
Using the information below, what would be the profit under variable costing and absorption costing, respectively?Sales $120,000Units Produced 35,000Units Sold 33,260Budgeted and actual fixed overhead cost $84,000Direct manufacturing cost $21,000Selling and administrative expenses $6,000
Multiple Choice QuestionWhen using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:Multiple choice question.contribution marginexpensesending inventoryselling expenses
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