Chapter 9

MARGINAL COSTING AND

ABSORPTION COSTING
In the previous chapter, we looked at how absorption costing can be used to calculate
the full cost of a cost unit, and how absorption costing can be used within a cost
accounting double entry bookkeeping system. Absorption costing is not the only
method of costing to measure costs and profits. An alternative costing method is
marginal costing.
This chapter describes marginal costing and compares the marginal costing and
absorption costing methods. This chapter covers syllabus area C2.

CONTENTS

1 Full cost and marginal cost

2 Contribution

3 Profit statements under absorption and marginal costing

4 Advantages of marginal costing

5 Advantages of absorption costing

LEARNING OUTCOMES

At the end of this chapter you should be able to:

• explain and illustrate the concept of contribution

• prepare profit statements using the marginal costing method

• compare and contrast the use of absorption and marginal costing for period profit
reporting and inventory valuation

• reconcile the profits reported by absorption and marginal costing

• explain the usefulness of profit and contribution information respectively.

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1 FULL COST AND MARGINAL COST

In absorption costing fixed manufacturing overheads are absorbed into cost units.
Thus, inventory is valued at total production cost and fixed manufacturing overheads
are charged in the income statement of the period in which the units are sold.

In marginal costing, fixed manufacturing overheads are not absorbed into cost units.
Inventory is valued at marginal or variable production cost. All fixed overheads,
including fixed manufacturing overheads, are treated as period costs and are charged
in the income statement of the period in which the overheads are incurred.

EXAMPLE

Company A produces a single product and has the following budget:

Company A Budget per unit
$
Selling price 10
Direct materials 3
Direct wages 2
Variable production overhead 1
Fixed production overhead is $10,000 per month; production volume is 5,000 units per
month.

Calculate the cost per unit to be used for inventory valuation under:

(a) absorption costing

(b) marginal costing.

SOLUTION

(a) Full absorption cost per unit

$
Direct materials 3
Direct wages 2
Variable production overhead 1

$10,000
Absorbed fixed production overhead 2
5,000 units
––––
Full production cost per unit $8
––––
(b) Marginal cost per unit
$
Direct materials 3
Direct wages 2
Variable production overhead 1
––––
Marginal production cost per unit $6
––––
The inventory valuation will be different for marginal and absorption costing.
Under absorption costing the inventory value will include variable and fixed
production overheads whereas under marginal costing the inventory value will
only include variable production overheads.

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2 CONTRIBUTION
Contribution is an important concept in marginal costing. It is the difference between
sales and the variable cost of sales. This can be written as:

Contribution = Sales – total variable cost of sales

Contribution is short for ‘contribution to fixed costs and profits’. The idea is that after
deducting the variable costs from sales, the figure remaining is the amount that
contributes to fixed costs, and, once fixed costs are covered, to profits.

2.1 CONTRIBUTION AND PROFIT

Marginal costing values goods at variable cost of production (or marginal cost) and
contribution can be shown as follows:
Marginal costing
$
Sales X
Less: all variable costs (X)
––––
Contribution X
Less: fixed production costs X
Less: all other fixed costs X
––––
Net profit X
––––
Profit is contribution less all fixed costs.

Note that there may be variable non-production costs which must also be deducted
from sales to arrive at contribution.

In absorption costing profit is effectively calculated in one stage as the cost of sales
already includes all overheads.
Absorption costing: profit calculation
$
Sales X
Less: absorption cost (X)
––––
Gross profit X
Less: non-production costs (X)
––––
Net profit X
––––

2.2 WHY IS CONTRIBUTION SIGNIFICANT?

Contribution is an important concept in marginal costing. Changes in the volume of

sales, or in sales prices, or in variable costs will all affect profit by altering the total
contribution. Marginal costing techniques can be used to help management to assess
the likely effect on profits of higher or lower sales volume, or the likely consequences
of reducing the sales price of a product in order to increase demand, and so on. The
approach to any such analysis should be to calculate the effect on total contribution.
The arithmetic is quite straightforward.

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EXAMPLE

A company sells a single product for $9. Its variable cost is $4. Fixed costs are
currently $70,000 per annum and annual sales are 20,000 units. There is a proposal
to make a change to the product design that would increase the variable cost to $4.50,
but it would also be possible to increase the selling price to $10 for the re-designed
model. It is expected that annual sales at this higher price would be 19,000 units.

How would the redesign of the product affect annual profit?

SOLUTION

Annual profit is increased by $4,500 as a result of the proposal as follows:

Before After
$ $
Sales (20,000 × $9) 180,000 (19,000 × $10) 190,000
Variable costs (20,000 × $4) 80,000 (19,000 × $4.50) 85,500
–––––– –––––––
Contribution 100,000 104,500
Fixed costs 70,000 70,000
–––––– –––––––
Profit 30,000 34,500
–––––– –––––––
An alternative presentation of the profit calculation is as follows:
Before After
Per unit ($) $ Per unit $
Sales 9 10
Variable costs 4 4 4.50
–––––– –––––––
Contribution 5 × 20,000 100,000 5.50 × 19,000 104,500
Fixed costs 70,000 70,000
–––––– –––––––
Profit 30,000 34,500
–––––– –––––––
When calculating the impact of changes to sales price, variable cost and sales volume
it is often quicker to calculate unit contribution figures. This approach also focuses on
the key information which is important to managers when making a decision.

3 PROFIT STATEMENTS UNDER ABSORPTION AND

MARGINAL COSTING
Absorption costing must be used to provide inventory valuations for statutory financial
statements. However, either marginal or absorption costing can be useful for internal
management reporting. The choice made will affect:

• the way in which the profit information is presented, and

• the level of reported profit, but only if sales volumes do not exactly equal
production volumes (so that there is a difference between opening and closing
inventory values).

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EXAMPLE

This example continues with the earlier example of Company A in Section 1. But the
business also has fixed selling costs of $1,500 and variable selling costs of $1 per
unit.

Show profit statements for the month if sales are 4,800 units and production is
5,000 units under:

(a) absorption costing

(b) marginal costing.

SOLUTION

(a) Profit statement under absorption costing

$ $
Sales (4,800 at $10) 48,000
Less:
Cost of sales
Opening inventory –
Production (5,000 at $8) 40,000
Less: Closing inventory (200 at $8) (1,600)
––––––
(38,400)
––––––
Gross profit 9,600
Selling costs:
Variable (4,800)
Fixed (1,500)
––––––
Net profit 3,300
––––––
(b) Profit statement under marginal costing
$ $
Sales (4,800 at $10) 48,000
Less:
Cost of sales
Opening inventory –
Production (5,000 at $6) 30,000
Less: Closing inventory (200 at $6) (1,200)
–––––––
(28,800)
Variable selling costs (4,800)
–––––––
Contribution 14,400
Less: Fixed product and selling overheads 11,500
–––––––
Gross profit $2,900
–––––––
Note how variable selling costs are deducted in the calculation of contribution in
the marginal costing statement.

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3.1 EXPLANATION OF THE DIFFERENCE IN PROFIT

The difference in profit between the two costing methods is due to the
difference in inventory levels between the beginning and the end of the period.
Here, there was an increase from 0 to 200 units during the month. Under absorption
costing closing inventory has been valued at $1,600 (i.e. $8 per unit which includes $2
of absorbed fixed overheads). Under marginal costing closing inventory is valued at
$1,200 (i.e. at $6 per unit) and all fixed overheads are charged to the income
statement as a period cost.

If inventory levels are rising or falling, absorption costing will give a different profit
figure from marginal costing. If sales equal production, the fixed overheads absorbed
into cost of sales under absorption costing will be the same as the period costs
charged under marginal costing and thus the profit figure will be the same.

The two profit figures can therefore be reconciled as follows:

$
Absorption costing profit 3,300
Less: fixed costs included in the increase in inventory (200 × $2) (400)
––––––
Marginal costing profit 2,900
––––––
The basic rule

• If inventory levels are rising, AC profit > MC profit.

• If inventory levels are falling AC profit < MC profit.

• If opening and closing inventory levels are the same, AC profit = MC profit.

3.2 UNDER AND OVER ABSORPTION OF FIXED OVERHEADS

Under and over absorption of fixed overheads arises if the actual expenditure and
production level are not as estimated in the predetermined overhead absorption rate.
Such differences between budgeted and actual expenditure and production cause
under or over absorption but have no effect on the different profit figures reported
under absorption and marginal costing, which is due to the different inventory
valuations. The next example illustrates this.

EXAMPLE

A manufacturing business makes and sells widgets. It has 2,000 units in inventory at
the start of the year. Budgeted production and sales for the year are 20,000 units. The
variable production cost per unit is $6 and budgeted fixed costs are $80,000. The
sales price per unit is $15. Ignore administration and selling and distribution
overheads.

During the year, actual production and sales totalled 16,000 units. Unit variable costs
and selling prices were as budgeted, and fixed costs were $77,000.

Compare the reported profit for the year with absorption costing and marginal
costing.

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SOLUTION
Marginal costing
$
Sales (16,000 × $15) 240,000
Variable cost of sales (16,000 × $6) 96,000
–––––––
Contribution 144,000
Fixed costs 77,000
–––––––
Profit 67,000
–––––––
With absorption costing, the absorption rate is ($80,000/20,000) $4 per unit. So
production and inventory is valued at $6 + $4 = $10.
Absorption costing
$ $
Sales 240,000
Opening inventory: (2,000 × $10) 20,000
Production cost: (16,000 × $10) 160,000
–––––––
180,000
Less: closing inventory: (2,000 × $10) (20,000)
–––––––
160,000
80,000
Overhead absorbed (16,000 × $4) 64,000
Overhead incurred 77,000
Under-absorbed overhead (13,000)
–––––––
Profit 67,000
–––––––
Profit is the same whichever costing method is used because there is no difference
between opening and closing inventory values.

ACTIVITY 1

A company produces a single unit of product for which the variable production cost is
$6 per unit. Fixed production overhead is $10,000 per month and the budgeted
production and sales volume is 5,000 units each month. The selling price is $10 per
unit. Suppose that, in a particular month, production was in fact 6,000 units with 4,800
units sold and 1,200 units left in closing inventory.

Assume all costs were as budgeted.

Required:

(a) Prepare the profit statement for the month under absorption costing.

(b) Prepare the profit statement for the month under marginal costing.

(c) Prepare a statement to reconcile the two reported profit figures.

For a suggested answer, see the ‘Answers’ section at the end of the book.

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4 ADVANTAGES OF MARGINAL COSTING

Preparation of routine operating statements using marginal costing is considered more
informative for the following reasons.

• Marginal costing emphasises variable costs per unit and treats fixed costs in
total as period costs, whereas absorption costing includes all production costs
in unit costs, including a share of fixed production costs. Marginal costing
therefore reflects the behaviour of costs in relation to activity. Since most
decision-making problems involve changes to activity, marginal costing
information is more relevant and appropriate for short-run decision-
making than absorption costing.

• Profit per unit with absorption costing can be a misleading figure. This is
because profitability might be distorted by increases or decreases in inventory
levels in the period, which has no relevance for sales.

• Comparison between products using absorption costing can be misleading

because of the effect of the arbitrary apportionment of fixed costs. Where two or
more products are manufactured in a factory and share all production facilities,
the fixed overhead can only be apportioned on an arbitrary basis

EXAMPLE

This example illustrates the misleading effect on profit which absorption costing
can have.

A company sells a product for $10, and incurs $4 of variable costs in its manufacture.
The fixed costs are $900 per year and are absorbed on the basis of the normal
production volume of 250 units per year. The results for the last four years were as
follows:
Item 1st 2nd 3rd 4th
year year year year
units units units units Total
Opening inventory – 200 300 300 –
Production 300 250 200 200 950
––––– ––––– ––––– ––––– –––––
300 450 500 500 950
Closing inventory 200 300 300 200 200
––––– ––––– ––––– ––––– –––––
Sales 100 150 200 300 750
––––– ––––– ––––– ––––– –––––
Prepare a profit statement under absorption and marginal costing.

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SOLUTION

The profit statement under absorption costing would be as follows:

1st year 2nd year 3rd year 4th year Total
$ $ $ $ $
Sales value 1,000 1,500 2,000 3,000 7,500
Opening inventory at $7.60 – 1,520 2,280 2,280 –
Variable costs of production at
$4 1,200 1,000 800 800 3,800
Fixed costs at 900/250 = $3.60 1,080 900 720 720 3,420
––––– ––––– ––––– ––––– –––––
2,280 3,420 3,800 3,800 7,220

Closing inventory at $7.60 1,520 2,280 2,280 1,520 1,520

––––– ––––– ––––– ––––– –––––
Cost of sales (760) (1,140) (1,520) (2,280) (5,700)
––––– ––––– ––––– ––––– –––––
(Under-)/over-absorption (W) 180 Nil (180) (180) (180)
––––– ––––– ––––– ––––– –––––
Gross profit 420 360 300 540 1,620
––––– ––––– ––––– ––––– –––––
Working: Calculation of over-/(under)-absorption
Year 1 2 3 4 Total
$ $ $ $ $
Absorbed 1,080 900 720 720 3,420
Incurred 900 900 900 900 3,600
––––– ––––– ––––– ––––– –––––
180 0 (180) (180) (180)
––––– ––––– ––––– ––––– –––––
If marginal costing had been used, the results would have been shown as follows:
Item 1st year 2nd year 3rd year 4th year Total
$ $ $ $ $
Sales 1,000 1,500 2,000 3,000 7,500
Variable cost of sales (at $4) 400 600 800 1,200 3,000
––––– ––––– ––––– ––––– –––––
Contribution 600 900 1,200 1,800 4,500
Fixed costs 900 900 900 900 3,600
––––– ––––– ––––– ––––– –––––
Gross profit/(loss) (300) – 300 900 900
––––– ––––– ––––– ––––– –––––
If it is assumed that there are no non-production costs, the marginal costing profit
statement indicates clearly that the business must sell at least 150 units per year to
break even. At a sales volume of 150 units each unit earns $6 in contribution which
covers the total fixed cost of $900. Using absorption costing, it might appear that even
at 100 units it was making a healthy profit.

The total profit for the four years is less with marginal costing than with absorption
costing because there has been an increase in inventory levels over the four-year
period. The closing inventory at the end of the fourth year is valued at $800 ($4 × 200)
with marginal costing and $1,520 with absorption costing. With absorption costing,
fixed costs of $720 are being carried forward in the closing inventory value, whereas
with marginal costing, they have all been charged against profit.

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The profit figures shown may be reconciled as follows:

Year 1 Year 2 Year 3 Year 4 Total
Inventory increase/(decrease) 200 100 0 (100 200
units units units) units
$ $ $ $ $
Profit/(loss) under marginal
costing (300) Nil 300 900 900

Fixed costs in inventory

increase/ (decrease) at $3.60
per unit 720 360 0 (360) 720
––––– ––––– ––––– ––––– –––––
Profit with absorption costing 420 360 300 540 1,620
––––– ––––– ––––– ––––– –––––
EXAMPLE

The next two examples illustrate the importance of marginal costing as an aid to
decision making.

A factory manufactures three components − X, Y and Z − and the budgeted production

for the year is 1,000 units, 1,500 units and 2,000 units respectively. Fixed overhead
amounts to $6,750 and has been apportioned on the basis of budgeted units: $1,500
to X, $2,250 to Y and $3,000 to Z. Sales and variable costs are as follows:

Component X Component Y Component Z

Selling price $4 $6 $5
Variable cost $1 $4 $4
SOLUTION

The budgeted income statement based on the above is as follows:

Component X Component Y Component Z Total
Sales units 1,000 1,500 2,000 4,500
$ $ $ $ $ $ $ $
Sales value 4,000 9,000 10,000 23,000
Variable cost 1,000 6,000 8,000 15,000
Fixed
overhead 1,500 2,250 3,000 6,750
–––––– –––––– –––––– ––––––
2,500 8,250 11,000 21,750
–––––– –––––– –––––– ––––––
Net profit/(loss) 1,500 750 (1,000) 1,250
–––––– –––––– –––––– ––––––

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There is little information value in comparing products in this way. If the fixed overhead
is common to all three products, there is no information value in apportioning it, and
the apportionment can be misleading. A better presentation is as follows:
Component Component Component
X Y Z Total
Sales units 1,000 1,500 2,000 4,500
–––––– –––––– –––––– ––––––
$ $ $ $
Sales value 4,000 9,000 10,000 23,000
Variable cost 1,000 6,000 8,000 15,000
–––––– –––––– –––––– ––––––
Contribution 3,000 3,000 2,000 8,000
–––––– –––––– –––––– ––––––
Fixed overhead 6,750
––––––
Net profit 1,250
––––––
Analysis may show, however, that certain fixed costs may be associated with a
specific product and the statement can be amended to differentiate specific fixed
costs (under products) from general fixed costs (under total).

EXAMPLE

A company that manufactures one product has calculated its cost on a quarterly
production budget of 10,000 units. The selling price was $5 per unit. Sales in the four
successive quarters of the last year were as follows:

Quarter 1 10,000 units

Quarter 2 9,000 units
Quarter 3 7,000 units
Quarter 4 5,500 units

The level of inventory at the beginning of the year was 1,000 units and the company
maintained its inventory of finished products at the same level at the end of each of
the four quarters.

Based on its quarterly production budget, the cost per unit was as follows:
Cost per unit
$
Prime cost 3.50
Production overhead 0.75
–––––
Total 4.25
–––––
Selling and administration overheads were $3,000 in each quarter.

Fixed production overhead, which has been taken into account in calculating the
above figures, was $5,000 per quarter. Selling and administration overhead was
treated as fixed, and was charged against sales in the period in which it was incurred.

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You are required to present a tabular statement to bring out the effect on net profit of
the declining volume of sales over the four quarters given, assuming in respect of
fixed production overhead that the company:

(a) absorbs it at the budgeted rate per unit

(b) does not absorb it into the product cost, but charges it against sales in each
quarter (i.e. the company uses marginal costing).

SOLUTION

(a) Net profit statement (fixed overhead absorbed)

1st 2nd 3rd 4th
quarter quarter quarter quarter
Sales units 10,000 9,000 7,000 5,500
–––––– –––––– –––––– ––––––
$ $ $ $
Sales value ($5 per unit) 50,000 45,000 35,000 27,500
–––––– –––––– –––––– ––––––
Cost of sales:
Prime costs ($3.50 per unit) 35,000 31,500 24,500 19,250
Production overhead absorbed
($0.75 per unit) 7,500 6,750 5,250 4,125
Under-absorbed production overhead
(Working) – 500 1,500 2,250
–––––– –––––– –––––– ––––––
42,500 38,750 31,250 25,625
–––––– –––––– –––––– ––––––
Gross profit 7,500 6,250 3,750 1,875
Less: Selling and admin overhead 3,000 3,000 3,000 3,000
–––––– –––––– –––––– ––––––
Net profit/(loss) 4,500 3,250 750 (1,125)
–––––– –––––– –––––– ––––––
Working

Fixed production overhead absorption rate =

Fixed production overhead $5,000

= = $0.50 per unit
Budgeted production 10,000 units

The production overhead cost per unit therefore consists of $0.50 of fixed cost
and $0.25 of variable cost.

As finished inventory is maintained at 1,000 units, fixed overhead under

absorbed in each quarter = $5,000 − (Sales units × $0.50).

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1st 2nd 3rd 4th

quarter quarter quarter quarter
$ $ $ $
Incurred
Variable 2,500 2,250 1,750 1,375
Fixed 5,000 5,000 5,000 5,000
––––– ––––– ––––– –––––
7,500 7,250 6,750 6,375
Absorbed (at $0.75) 7,500 6,750 5,250 4,125
––––– ––––– ––––– –––––
Under-absorbed overhead 0 (500) (1,500) (2,250)
––––– ––––– ––––– –––––
(b) Net profit statement (fixed overhead charged against period sales)
1st 2nd 3rd 4th
quarter quarter quarter quarter
Sales units 10,000 9,000 7,000 5,500
––––– ––––– ––––– –––––
$ $ $ $
Sales value 50,000 45,000 35,000 27,500
Less:
Variable cost of sales
Prime cost ($3.50 per unit) 35,000 31,500 24,500 19,250
Variable production overhead
($0.25) 2,500 2,250 1,750 1,375
––––– ––––– ––––– –––––
Contribution 12,500 11,250 8,750 6,875
Less:
Fixed production, selling and
admin overhead 8,000 8,000 8,000 8,000
––––– ––––– ––––– –––––
Net profit/(loss) 4,500 3,250 750 (1,125)
––––– ––––– ––––– –––––

5 ADVANTAGES OF ABSORPTION COSTING

In spite of its weaknesses as a system for providing information to management,
absorption costing is widely used.

The only difference between using absorption costing and marginal costing as the
basis of inventory valuation is the treatment of fixed production costs.

The arguments used in favour of absorption costing are as follows:

• Fixed costs are incurred within the production function, and without those
facilities production would not be possible. Consequently such costs can be
related to production and should be included in inventory valuation.

• Absorption costing follows the matching concept by carrying forward a

proportion of the production cost in the inventory valuation to be matched
against the sales value when the items are sold.

• It is necessary to include fixed overhead in inventory values for financial

statements; routine cost accounting using absorption costing produces
inventory values which include a share of fixed overhead.

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• Overhead allotment is the only practicable way of obtaining job costs for
estimating prices and profit analysis.

• Analysis of under-/over-absorbed overhead is useful to identify inefficient

utilisation of production resources.

• It is quite common to price jobs or contracts by adding a profit margin to the

estimated fully-absorbed cost of the work.

The main weaknesses of absorption costing were explained earlier. Absorption

costing can provide misleading information to management whenever a decision has
to be made.

Marginal costing is consistent with the concept of relevant costs for management
decision-making. It is also useful for forward planning, for example in forecasting and
budgeting. These applications of marginal costing will be explained more fully in later
chapters.

CONCLUSION
This chapter has explained how to prepare profit statements using absorption and marginal
costing and how to reconcile any differences in resulting profits. You should also now
understand for what purposes an organisation may use absorption costing and marginal
costing.

KEY TERMS
Absorption costing – a costing technique that values production and inventory at full
production cost.

Marginal costing – a costing technique that values production and inventory at variable
production cost. All variable costs are deducted from sales to arrive at contribution and fixed
costs are treated as period costs in arriving at profit.

Contribution – sales revenue less variable costs.

SELF TEST QUESTIONS

Paragraph

1 What is marginal costing? 1

2 What is marginal cost? 1

3 What is the difference between marginal costing and absorption costing? 1

4 What is contribution? 2

5 What is the reason for the difference in profit between marginal costing
and absorption costing? 3.1

6 What are the advantages of marginal costing? 4

7 What are the advantages of absorption costing? 5

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EXAM-STYLE QUESTIONS

1 In a period closing inventory was 1,400 units, opening inventory was 2,000 units, and
the actual production was 11,200 units at a total cost of $4.50 per unit compared to a
target cost of $5.00 per unit. When comparing the profits reported using marginal
costing with those reported using absorption costing, which of the following statements
is correct?

A Absorption costing reports profits $2,700 higher

B Absorption costing reports profits $2,700 lower

C Absorption costing reports profits $3,000 higher

D There is insufficient data to calculate the difference between the reported profits

2 When comparing the profits reported under marginal and absorption costing during a
period when the level of inventory has increased:

A absorption costing profits will be higher and closing inventory valuations lower
than those under marginal costing

B absorption costing profits will be higher and closing inventory valuations higher
than those under marginal costing

C marginal costing profits will be higher and closing inventory valuations lower
than those under absorption costing

D marginal costing profits will be lower and closing inventory valuations higher
than those under absorption costing.

3 Contribution is:

A sales – total costs

B sales – variable costs

C variable costs of production less labour costs

D none of the above.

4 Identify which of the following statements would be true: fixed production overheads
will always be under-absorbed when:

A actual output is lower than budgeted output

B actual overheads incurred are lower than budgeted overheads

C overheads absorbed are lower than those budgeted

D overheads absorbed are lower than those incurred

5 A company uses a standard absorption costing system. The fixed overhead

absorption rate is based on labour hours. Extracts from the company’s records for last
year were as follows:
The ______ (choose between over and under) absorbed fixed production overheads
for the year were $______ (fill in the value).

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6 Exe Limited makes a single product whose total cost per unit is budgeted to be $45.
This includes fixed cost of $8 per unit based on a volume of 10,000 units per period. In
a period, sales volume was 9,000 units, and production volume was 11,500 units. The
actual profit for the same period, calculated using absorption costing, was $42,000.

If the profit statement were prepared using marginal costing, identify the profit for the
period:

A $10,000

B $22,000

C $50,000

D $62,000

7 Which of the following statements is not an advantage of marginal costing?

A Marginal costing is more relevant and appropriate for short-run decision making

B Marginal costing avoids profits being distorted by changes in inventory levels

C Marginal costing follows the matching concept

D Marginal costing avoids arbitrary apportionments of fixed overheads

8 An organisation makes a single product whose total cost per unit is budgeted to be
$12. This includes fixed cost of $1.50 per unit based on a volume of 6,000 units per
period. In a period, sales volume was 7,000 units, and production volume was 5,000
units. The actual profit for the same period, calculated using absorption costing, was
$56,000.

If the profit statement were prepared using marginal costing, identify the profit for the
period:

A $53,000

B $56,000

C $59,000

D $63,500

For the answers to these questions, see the 'Answers' section at the end of the book.

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