1. A company produced 5,000 units and sold 4,200 units. Fixed production overheads were budgeted at CU 60,000 for the 5,000 units and there was no opening inventory. By how much does absorption costing profit differ from marginal costing profit?

A) CU 9,600 higher
B) CU 9,600 lower
C) CU 12,000 higher
D) CU 60,000 higher

Correct: A difficult IAS 2.10-13

The fixed overhead absorption rate is 60,000 / 5,000 = CU 12 per unit. Closing inventory is 800 units, so CU 9,600 of fixed overhead is carried forward in inventory under absorption costing and profit is CU 9,600 higher. If you answered CU 9,600 lower you reversed the direction. If you answered CU 12,000 higher you used the rate for 1,000 units. If you answered CU 60,000 higher you used all of the fixed overhead.

2. Opening inventory was 1,000 units and closing inventory 2,500 units. The fixed overhead absorption rate is CU 4 per unit. Marginal costing profit was CU 42,000. What was the absorption costing profit?

A) CU 36,000
B) CU 38,000
C) CU 48,000
D) CU 52,000

Correct: C difficult IAS 2.10-13

Inventory rose by 1,500 units, so fixed overhead of 1,500 x 4 = CU 6,000 was deferred in inventory. Absorption profit = 42,000 + 6,000 = CU 48,000. If you answered CU 36,000 you subtracted the change. If you answered CU 38,000 you subtracted the opening inventory fixed overhead (4,000). If you answered CU 52,000 you added the opening inventory fixed overhead (4,000).

3. Opening inventory was 3,200 units and closing inventory 4,700 units. Marginal costing profit was CU 62,400 and absorption costing profit CU 69,600. What is the fixed overhead absorption rate per unit?

A) CU 0.91
B) CU 4.80
C) CU 1.53
D) CU 2.25

Correct: B difficult IAS 2.10-13

The profit difference is 69,600 - 62,400 = CU 7,200, which equals the change in inventory (4,700 - 3,200 = 1,500 units) x the absorption rate. Rate = 7,200 / 1,500 = CU 4.80. If you answered CU 1.53 you divided by closing inventory. If you answered CU 2.25 you divided by opening inventory. If you answered CU 0.91 you divided by the sum of both (7,900 units).

4. A product has a variable cost of CU 14 per unit and a fixed overhead absorption rate of CU 6 per unit. What is the difference between the closing inventory valuations of 600 units under absorption and marginal costing?

A) Absorption costing is CU 3,600 higher
B) Marginal costing is CU 3,600 higher
C) Absorption costing is CU 8,400 higher
D) Absorption costing is CU 12,000 higher

Correct: A difficult IAS 2.10-13

Marginal costing values inventory at variable cost only (600 x 14 = CU 8,400). Absorption costing adds fixed overhead (600 x 20 = CU 12,000). The difference is 600 x 6 = CU 3,600, with absorption costing higher. If you answered CU 8,400 you took the marginal inventory value as the difference. If you answered CU 12,000 you took the absorption value.

5. The selling price is CU 40 and the variable cost CU 24 per unit. Fixed costs are CU 38,000 and sales are 3,000 units. If sales rise by 200 units with fixed costs unchanged, what is the effect on profit?

A) An increase of CU 4,800
B) An increase of CU 8,000
C) An increase of CU 3,200
D) An increase of CU 13,200

Correct: C difficult CVP analysis

Each extra unit adds contribution of 40 - 24 = CU 16, so 200 units add CU 3,200. Fixed costs do not change. If you answered CU 4,800 you used the variable cost (200 x 24). If you answered CU 8,000 you used the selling price (200 x 40). If you answered CU 13,200 you added the extra contribution to the existing profit of CU 10,000.

6. Production exceeded sales in the period. Which of the following statements are correct? (1) Absorption costing profit is higher than marginal costing profit. (2) Marginal costing values closing inventory lower than absorption costing. (3) Over the life of the product, total profit is different under the two methods.

A) (1) only
B) (2) and (3) only
C) (1) and (2) only
D) (1), (2) and (3)

Correct: C difficult IAS 2.10-13

When production exceeds sales, inventory increases and absorption costing defers fixed overhead in inventory, so its profit is higher (1) and its inventory is higher than under marginal costing (2). Over the whole life of a product total profit is the same under both methods, so (3) is wrong.

7. A company produced 5,000 units and sold 4,000 units at CU 30. Variable cost is CU 18 per unit. Fixed overhead was budgeted at CU 60,000 (absorbed at CU 12 per unit) and actual fixed overhead was CU 63,000. There was no opening inventory. What is the profit or loss under absorption costing?

A) Nil
B) CU 3,000 loss
C) CU 3,000 profit
D) CU 15,000 loss

Correct: B difficult IAS 2.10-13

Sales = 120,000. Cost of sales = 4,000 x (18 + 12) = 120,000. Gross profit is nil. Fixed overhead is under-absorbed by 63,000 - 60,000 = 3,000, which is charged to profit, giving a loss of CU 3,000. Marginal costing gives contribution 4,000 x 12 = 48,000 less fixed 63,000 = a loss of CU 15,000, which is the answer if you ignored the fixed overhead carried in inventory. If you answered nil you ignored the under-absorption. If you answered a CU 3,000 profit you reversed it.

8. Which of the following is a limitation of marginal costing for external financial reporting?

A) It cannot be used to find the contribution per unit
B) Inventory is valued without fixed production overheads, which does not comply with IAS 2
C) It requires fixed costs to be apportioned to products
D) It cannot be used to find break-even output

Correct: B difficult IAS 2.12

IAS 2 requires inventory to include a systematic allocation of fixed production overheads based on normal capacity, so marginal costing inventory values are not acceptable for external reporting. Contribution, break-even and avoiding apportionment of fixed costs are strengths of marginal costing.

9. Fixed production overheads are CU 80,000. Normal capacity is 10,000 units, budgeted output was 11,000 units and 7,000 units were actually produced. Under IAS 2, what fixed overhead per unit is included in inventory?

A) CU 7.27
B) CU 11.43
C) CU 16.00
D) CU 8.00

Correct: D difficult IAS 2.13

IAS 2.13 requires the allocation to be based on normal capacity: 80,000 / 10,000 = CU 8 per unit. The unallocated fixed overhead, because production was low, is expensed. If you answered CU 11.43 you used actual output. If you answered CU 7.27 you used budgeted output. If you answered CU 16.00 you doubled the rate.

10. A company produced 3,000 units and sold 2,500 units at CU 20. Variable cost is CU 9 per unit and fixed production overhead CU 6,000 (absorbed over production). There was no opening inventory. What is the absorption costing profit?

A) CU 21,500
B) CU 27,500
C) CU 50,000
D) CU 22,500

Correct: D difficult IAS 2.10-13

Absorption rate = 6,000 / 3,000 = CU 2, so the unit cost is CU 11. Profit = 2,500 x 20 - 2,500 x 11 = 50,000 - 27,500 = CU 22,500. Marginal profit is 2,500 x 11 - 6,000 = CU 21,500, which is the answer if you did not defer fixed overhead. If you answered CU 27,500 you gave the cost of sales. If you answered CU 50,000 you gave the sales revenue.

11. Which of the following statements are correct? (1) Marginal costing excludes fixed overheads from inventory valuation. (2) IAS 2 requires production overheads to be included in inventory. (3) Marginal costing is acceptable for IFRS financial statements.

A) (1) only
B) (2) and (3) only
C) (1), (2) and (3)
D) (1) and (2) only

Correct: D difficult IAS 2.10-13

Marginal costing values inventory at variable cost (1). IAS 2 requires inventory to include production overheads (2), so marginal costing inventory values do not comply and (3) is incorrect.

12. Inventory falls during a period. Compared with absorption costing profit, marginal costing profit will be:

A) Lower, because marginal costing ignores fixed costs
B) The same, because total fixed costs are the same
C) Higher, because marginal costing includes fixed costs in inventory
D) Higher, because fixed overhead released from opening inventory is charged under absorption costing

Correct: D difficult IAS 2.10-13

When inventory falls, opening inventory carries fixed overheads that are charged to cost of sales under absorption costing, in addition to the current period's fixed overheads absorbed. Marginal costing charges only the period's fixed costs, so its profit is higher.

13. Contribution is CU 12.50 per unit and fixed costs are CU 90,000. Sales are expected to rise by 300 units. What is the effect on profit?

A) An increase of CU 3,000
B) An increase of CU 12,500
C) An increase of CU 3,750
D) An increase of CU 93,750

Correct: C difficult CVP analysis

Only the contribution increases: 300 x 12.50 = CU 3,750. Fixed costs are unchanged. If you answered CU 3,000 you used the wrong number of units. If you answered CU 12,500 you took the contribution of 1,000 units. If you answered CU 93,750 you added the fixed costs.

14. A company's variable cost is CU 6 and fixed production overhead is absorbed at CU 4 per unit. A customer offers to buy 1,000 extra units at CU 8 from spare capacity. Fixed costs do not change. What is the effect of accepting the order on profit?

A) An increase of CU 2,000
B) A decrease of CU 2,000
C) An increase of CU 4,000
D) An increase of CU 8,000

Correct: A difficult Relevant costs

The relevant cost is the variable cost of CU 6. Contribution per unit = 8 - 6 = CU 2, so profit rises by 1,000 x 2 = CU 2,000. The absorbed fixed overhead is not an incremental cost. If you answered a decrease of CU 2,000 you charged the full cost of CU 10 per unit. If you answered CU 4,000 you treated the absorbed overhead of CU 4 as the cost (8 - 4). If you answered CU 8,000 you used the price.

15. Sales are steady at 2,000 units. Production rises from 2,000 to 2,600 units with total fixed overhead unchanged. The fixed overhead absorption rate is CU 5 per unit. What is the effect on profit?

A) Both profits are unchanged
B) Marginal costing profit is unchanged; absorption costing profit rises by CU 3,000
C) Marginal costing profit rises by CU 3,000; absorption costing profit is unchanged
D) Both profits rise by CU 3,000

Correct: B difficult IAS 2.10-13

Marginal costing profit depends on sales volume and contribution only, so it does not change. Under absorption costing the extra 600 units of production carry fixed overhead of 600 x 5 = CU 3,000 into closing inventory, so profit rises by that amount.

16. A company produces 10,000 units and sells 8,000. Variable cost is CU 12 per unit; fixed production overhead is absorbed at CU 5 per unit. Absorption costing profit is CU 74,000. What is marginal costing profit?

A) CU 84,000
B) CU 74,000
C) CU 54,000
D) CU 64,000

Correct: D difficult IAS 2.12, 2.13

Inventory rose by 2,000 units, so 2,000 x CU 5 = CU 10,000 of fixed overhead is deferred in absorption costing. Marginal profit = 74,000 - 10,000 = CU 64,000. If you answered CU 84,000 you added the difference. If you answered CU 74,000 you assumed profits are equal. If you answered CU 54,000 you used 2,000 x CU 10.

17. Opening inventory was 3,000 units and closing inventory 1,000 units. The fixed overhead absorption rate is CU 8 per unit. Marginal costing profit is CU 90,000. What is absorption costing profit?

A) CU 106,000
B) CU 74,000
C) CU 90,000
D) CU 82,000

Correct: B difficult IAS 2.12, 2.13

Inventory fell by 2,000 units, so CU 16,000 of fixed overhead brought forward is charged in the period. Absorption profit = 90,000 - 16,000 = CU 74,000. If you answered CU 106,000 you added instead of deducting. If you answered CU 90,000 you ignored the inventory change. If you answered CU 82,000 you used CU 4 per unit.

18. A product sells for CU 20. Variable costs per unit are materials CU 8, labour CU 3 and selling CU 1. Fixed costs are CU 30,000. 5,000 units are made and sold. What is the profit?

A) CU 15,000
B) CU 40,000
C) CU 30,000
D) CU 10,000

Correct: D difficult IAS 2.10

Contribution per unit = 20 - 8 - 3 - 1 = CU 8; total CU 40,000. Profit = 40,000 - 30,000 = CU 10,000. If you answered CU 15,000 you left out the variable selling cost (contribution CU 9). If you answered CU 40,000 you gave contribution, not profit. If you answered CU 30,000 you gave the fixed costs.

19. Budgeted output is 20,000 units with fixed production overhead of CU 160,000. Actual production is 18,000 units and sales are 17,000 units at CU 30. Variable cost is CU 14 per unit and actual fixed overhead equals budget. What is absorption costing profit?

A) CU 136,000
B) CU 120,000
C) CU 112,000
D) CU 104,000

Correct: B difficult IAS 2.13

Rate = CU 8. Cost of sales = 17,000 x (14 + 8) = CU 374,000. Under-absorption = (20,000 - 18,000) x 8 = CU 16,000. Profit = 510,000 - 374,000 - 16,000 = CU 120,000. If you answered CU 136,000 you ignored the under-absorption. If you answered CU 112,000 you gave marginal profit (17,000 x 16 - 160,000). If you answered CU 104,000 you deducted the under-absorption twice.

20. Which TWO of the following statements are correct? (1) Marginal costing values inventory at variable production cost only. (2) When production exceeds sales, absorption costing profit is higher than marginal costing profit (rates constant). (3) Under marginal costing, fixed production overhead is included in inventory.

A) (1) and (2)
B) (1) and (3)
C) (2) and (3)
D) (1) only

Correct: A difficult IAS 2.12

Marginal costing excludes fixed overhead from inventory (so statement 3 is false). With rising inventory, absorption costing defers fixed overhead, giving a higher profit.

21. Fixed overhead is absorbed at CU 5 per unit on normal output of 10,000 units, and actual fixed overhead is CU 50,000 each period. Period 1: production 12,000, sales 10,000. Period 2: production 8,000, sales 10,000. Compared with marginal costing profit in Period 2, absorption costing profit is:

A) CU 10,000 higher
B) CU 10,000 lower
C) CU 20,000 lower
D) The same, because total fixed costs are equal

Correct: B difficult IAS 2.12

Opening inventory of 2,000 units carries CU 10,000 of fixed overhead from Period 1 into Period 2 cost of sales, and closing inventory is nil. Absorption profit is therefore CU 10,000 lower in Period 2. If you answered CU 10,000 higher you reversed the direction. If you answered CU 20,000 you used CU 10 per unit. If you answered 'the same' you looked at one period's costs instead of the movement in inventory.

22. A business has spare capacity. A one-off order of 1,000 units needs materials CU 5 and labour CU 4 per unit (both variable), and special tooling hire of CU 3,000. Normal fixed overhead absorbed is CU 6 per unit. What is the minimum acceptable price per unit?

A) CU 9
B) CU 15
C) CU 18
D) CU 12

Correct: D difficult Relevant costing

Relevant costs are variable costs plus the incremental tooling: 5 + 4 + 3,000/1,000 = CU 12. Absorbed fixed overhead is not incremental. If you answered CU 9 you ignored the tooling hire. If you answered CU 15 you included fixed overhead but not tooling. If you answered CU 18 you included both.

23. Product X earns total contribution of CU 40,000. Fixed costs allocated to it are CU 55,000, of which CU 30,000 would be saved if it were discontinued. What is the effect of discontinuing Product X on total profit?

A) Profit rises by CU 15,000
B) Profit rises by CU 10,000
C) Profit falls by CU 10,000
D) Profit falls by CU 40,000

Correct: C difficult Relevant costing

Closing loses CU 40,000 contribution but saves only CU 30,000 of avoidable fixed costs, so profit falls by CU 10,000. If you answered 'rises by CU 15,000' you compared contribution with all allocated fixed costs (40,000 - 55,000 = -15,000). If you answered 'rises by CU 10,000' you reversed the direction. If you answered 'falls by CU 40,000' you ignored the savings.

24. Marginal costing profit is CU 100,000. Opening inventory of 1,000 units carries fixed overhead of CU 6 per unit. Closing inventory of 3,000 units carries fixed overhead of CU 8 per unit. What is absorption costing profit?

A) CU 124,000
B) CU 116,000
C) CU 82,000
D) CU 118,000

Correct: D difficult IAS 2.12, 2.13

Difference = fixed overhead in closing inventory less that in opening inventory = 24,000 - 6,000 = CU 18,000. Absorption profit = 100,000 + 18,000 = CU 118,000. If you answered CU 124,000 you added closing fixed overhead only. If you answered CU 116,000 you used the 2,000-unit change at CU 8. If you answered CU 82,000 you reversed the sign.

25. Product A has contribution of CU 10 per unit and Product B CU 15 per unit. Sales are 3,000 units of A and 2,000 units of B. Fixed costs are CU 40,000. What is the profit?

A) CU 20,000
B) CU 60,000
C) CU 22,500
D) CU 30,000

Correct: A difficult IAS 2.10

Total contribution = 30,000 + 30,000 = CU 60,000. Profit = 60,000 - 40,000 = CU 20,000. If you answered CU 60,000 you gave contribution. If you answered CU 22,500 you used a simple average contribution of CU 12.50 (5,000 x 12.50 - 40,000). If you answered CU 30,000 you counted one product only.