ICANManagement InformationAbsorption and Marginal Costing2025

Port Harcourt Chemicals Limited produced 20,000 units and sold 17,500 units during the quarter ended 30 September 2024. The following cost data applies: Variable production cost ₦450 per unit; Fixed production overhead ₦3,000,000 (absorbed on actual production); Selling price ₦900 per unit. What is the difference between absorption costing profit and marginal costing profit for the quarter?

A₦375,000, absorption costing profit is higherCORRECT
B₦375,000, marginal costing profit is higher
C₦262,500, absorption costing profit is higher
D₦262,500, marginal costing profit is higher
AI
Toaster Teacher
Why the answer is A, and why the others tempt you.
Fixed overhead absorption rate = ₦3,000,000 ÷ 20,000 = ₦150 per unit. Closing inventory = 20,000 – 17,500 = 2,500 units. The difference in profit = closing inventory units × FOAR = 2,500 × ₦150 = ₦375,000. Since inventory increased, absorption costing defers ₦375,000 of fixed overhead in closing inventory, making absorption costing profit higher by ₦375,000.
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