MA1:Management Information:

Absorption and Marginal Costing:

Question#1:
The following statements relate to absorption and marginal costing:
(1)Absorption costing profit will always be higher than marginal costing profit in any period when
inventory is increasing
(2)Inventory valuations will always be greater if absorption costing rather than marginal costing is used
Which of the statement(s) is/are TRUE?
A. Statement 1 only’
B. Both statement 1 and statement 2
C. Statement 2 only
D. Neither statement 1 nor statement 2
Question#2:
Product X is manufactured by Y Co. Direct materials cost $6.10 and prime costs total $9.60 per unit of
product. Production overheads are absorbed at a rate of $13.40 per machine hour. Two units of product
X are manufactured per machine hour.
Using absorption costing, what is the total production cost per unit of product X?
A.$16.30
B.$22.40
C.$23.00
D.$29.10
Question#3:
Using marginal costing, what is the basis for valuing inventory goods in a manufactured business?
A. Direct + indirect production costs
B. Prime costs + total variable costs
C. Prime costs + variable production overheads
D. Production costs + variable non-production costs
Question#4:
25,000 units of a company’s single product are produced in a period during which 28,000 units are sold.
Opening inventory was 7,000 units.
Unit costs of the product are: $ per unit
Direct costs 16.20
Fixed production overhead 7.60
Fixed non-production overhead 2.90
What is the difference in profit between absorption and marginal costing?
A.$22,800
B.$30,400
C.$31,500
D.$42,000
Question#5:
Which of the following correctly describes the concept of contribution?
A. The difference between sales value and total costs
B. The difference between sales value and the marginal cost of sales
C. The difference between sales value and the fixed cost
D. The difference between sales value and non production cost

Question#6:
A company sold 10,000 units of its single product in a period during which finished goods inventory
increased by 2,000 units.
Based on absorption costing how would the profit in the period and the inventory value at the end of
the period compare with those calculated using marginal costing (MC)?
Higher than MC Lower than MC
Inventory value
Profit
Question#7:
Are each of the following production overheads included in product costs using absorption costing?
Yes No
Variable overhead costs Fixed
overhead costs Question#8:
A company had opening inventory of 48,500 units and closing inventory of 45,500 units. Profits based on
marginal costing were $315,250 and on absorption costing were $288,250. What is the fixed production
overhead absorption rate per unit?
A.$5.94
B.$6.34
C.$6.50
D.$9.00
Question#9:
A company currently uses absorption costing. The following information relates to Product X for Month
1:
Opening inventory Nil
Production 900 units
Sales 800 units
If the company had used marginal costing, which of the following combinations would be true?
Profit Inventory valuation
A. Would be higher Would be higher
B. Would be higher Would be lower
C. Would be lower Would be higher
D. Would be lower Would be lower
Question#10:
When opening inventory was 8,500 litres and closing inventory 6,750 litres, a firm had a profit of
$27,400 using marginal costing. Assuming that the fixed production overhead absorption rate was $2
per litre,
What profit would be reported using absorption costing?
A.$30,900
B.$30,500
C.$23,900
D.$27,400
Question#11:
Product Y is manufactured by Y Co. Direct materials cost $8 and prime costs total 12 per unit of product.
Production overheads are absorbed at a rate of $13.40 per machine hour. Two units of product X are
manufactured per machine hour.
Using absorption costing, what is the total production cost per unit of product X?
A. $16.30
B. $18.70
C. $14.70 D.$29.10
Question#12:
Are each of the following production overheads included in product costs using marginal costing?
Yes No
Variable overhead costs Fixed
overhead costs
Question#13:
26,000 units of a company’s single product are produced in a period during which 28,000 units are sold.
Opening inventory was 7,000 units.
Unit costs of the product are: $ per unit
Direct costs 16.20
Fixed production overhead 7.60
Fixed non-production overhead 2.90
What is the difference in profit between absorption and marginal costing?
A.$15,200
B.$21,000
C.$31,500
D.$53,400
Question#14:
The following statements relate to absorption and marginal costing:
(1)Marginal costing profit will always be higher than absorption costing profit in any period when
inventory is increasing
(2)Inventory valuations will always be greater if marginal costing rather than absorption costing is used
Which of the statement(s) is/are TRUE?
A. Statement 1 only’
B. Both statement 1 and statement 2
C. Statement 2 only
D. Neither statement 1 nor statement 2
Question#15:
A company had opening inventory of 300 units and closing inventory of 600 units. Profits based on
marginal costing were $10,000 and fixed overhead absorption rate were $3/unit. What is the
Profit under absorption costing?
A. $10,900
B. $9,100
C. $9,000
D. $8,000

Question#16:
Which of the following correctly describes the treatment of selling distribution overheads in marginal
costing?
a) All selling and distribution overheads are included in the inventory valuation
b) All selling and distribution overheads are deducted after contribution has been calculated
c) Fixed selling and distribution overheads are deducted after contribution has been calculated
d) Variable selling and distribution overheads are deducted after contribution has been calculated

Question#17:
A company does not hold any opening or closing stocks
Which of the following statements is true?
a) It is impossible to determine whether absorption costing or marginal costing would produce the
higher profit without being provided with figures
b) Profit will be higher if marginal costing is used
c) Profit will be higher if absorption costing is used
d) Profit would be the same if either absorption costing or marginal costing were used

Question#18:
When opening stocks were 8,500 litres and closing stock 10,000 litres, Carpet Ltd had a profit of £75,000
using marginal costing
Assuming that the fixed overhead absorption rate was £8 per litre what would be the profit using
absorption costing?

Question#19:
Filtra limited produces a single product and currently uses absorption costing for its internal
management accounting reports
The fixed production overhead absorption rate is £20 per unit. Opening stocks for the year were 100
units and closing stocks were 50 units
Bertie blades the company’s management accountant is considering a switch to marginal costing as the
stock valuation basis
If marginal costing were used the management account profit for the year, compared with the profit
calculated under the absorption costing method would be:

Question#20:
Profits under absorption costing were £101,500 whilst under marginal costing the profit was only
£95,800. Fixed overheads are absorbed at £8 per unit and 2,250 units are held in closing stock
How many units of opening stock were there be (to the nearest unit)?

Question#21:
In a period opening stocks were 10,000 units and closing stocks were 11,000 units profit bases on
marginal costing were £100,000and profits under absorption costing were £10,000 and profits under
absorption costing were $105,000
The fixed overhead absorption rate per unit is:

Question#22:

R limited has generated a profit of $20,000 under marginal costing principles for the month. The fixed
cost per unit was $10/unit and the level of inventory has not changed during the period.
How would the profit be affected by using absorption costing principles?
A Profit would be larger.
B Profit would be smaller.
C Profit would be unchanged.
D We do not know.

Question#23:
A company has generated a profit of $100,000 using absorption costing principles.

During the Year $

Opening Inventory 1,000 units valued at $20,000
Closing Inventory 800 units valued at $16,000

The fixed overhead cost per unit is $8.

What will the profit be under marginal costing principles?
A $96,000.
B $100,000.
C $101,600.
D $104,000.

Question#24:
A company reporting a profit of $45,000 under marginal costing principles and $48,000 under
absorption costing principles.
Which of the following must be the case based on these values:
A Increase in stock.
B Decrease in stock.
C No change in stock.
D Unable to calculate.

Question#25:
Last month, when a company had an opening stock of 16,500 units and a closing stock of 18,000
units, the profit using absorption costing was $40,000. The fixed production overhead rate was $10
per unit.
What would the profit for last month have been using marginal costing?
A $15,000.
B $25,000.
C $55,000.
D $65,000.
Question#26:
A company which uses marginal costing has a profit of $37,500 for a period. Opening stock was 100
units and closing stock was 350 units. The fixed production overhead absorption rate is $4 per unit.
What is the profit under absorption costing?
A $35,700
B $36,500
C $38,500
D $39,300

Question#27:
The fixed overhead absorption rate for a company is $5 per labor hour. For a given month, the following
information is available:
Opening Inventory 10,000 units
Production 50,000 units
Sales 45,000 units

Each unit requires 2 labor hours. Which of the following statements are correct:
A Marginal costing profit will be $25,000 higher than absorption costing profit.
B Marginal costing profit will be $25,000 lower than absorption costing profit.
C Marginal costing profit will be $50,000 higher than absorption costing profit.
D Marginal costing profit will be $50,000 lower than absorption costing profit.

Question#28:
A company operates a marginal costing system. The following budgeted information is available:
Opening Inventory 200 units
Production 2,000 units
Sales 1,500 units
Direct Labor/Unit $32
Direct Materials/Unit $20
Variable Overhead/Unit $15
Fixed Overhead/Unit $25

What is the value of the closing inventory in the budgeted profit statement?
A $64,400.
B $46,900.
C $46,000.
D $33,500.
Question#29:
A company operates an absorption costing system. The following budgeted information is available:

Opening Inventory 200 units

Production 2,000 units
Sales 1,500 units

Production Costs:
Direct Labor/Unit $32
Direct Materials/Unit $20
Variable Overhead/Unit $15
Fixed Overhead/Unit $25

What is the value of the closing inventory in the budgeted profit statement?
A $64,400
B $46,900
C $46,000
D $33,500

Question#30:

A company has calculated a profit of $60,000 using marginal costing. Opening inventory was 200 units.
Production and sales were both 5,000 units. Actual fixed costs for the period were $50,000. Fixed
overheads were over absorbed by $3,000. The overhead absorption rate per unit was based on
budgeted activity of 4,500 units.
What would the profit be if absorption costing principles were applied:
A $57,880.
B $60,000.
C $62,000.
D $62,120.

Question#31:
A company has a profit of $75,000 using a marginal costing system. Budgeted fixed costs were $30,000
and budgeted activity was 10,000 units. The following information is also available:

Opening Inventory 500 units

Production 10,500 units
Sales 10,750 units

What would the profit be using absorption costing?

A $72,750
B $74,250
C $75,750
D $77,250
Question#32:
A company has a profit of $42,000 using absorption costing principles. The following information is
available:
Opening Inventory 400 units
Production 5,000 units
Sales 5,200 units

The fixed overhead cost per unit is $4

What is the profit using a marginal costing system?
$__________
a) $42,800
b) $89,022
c) $42,000
d) $42,500

Question#33:
In a period closing inventory was 1,400units 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

Question#34:
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

Question#35:
Contribution is:
a) Sales – total cost
b) Sales all variable cost
c) Variable costs of production less labor cost
d) None of the above