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Selling Costs per unit and variable costs per unit are $8 and $5 respectively. Fixed production...

Selling Costs per unit and variable costs per unit are $8 and $5 respectively. Fixed production overhead for June is $900. Units produced and sold are 600 and 450 units respectively. Nil inventory was held at the beginning of June. Which of the following is the difference in production margin reported for June under absorption costing as compared to that under marginal costing?
a) 450 higher under absorption costing
b) 225 higher under absorption costing
c) 150 higher under absorption costing
d) 300 higher under absorption costing

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Answer #1

Difference in absorption costing and variable costing income arises due to the difference in valuation of inventory in both the costing systems. Due to the presence of fixed production overhead in the inventory, inventory cost is higher in absorption costing and thus production cost is lower under absorption costing. Thus income under absorption costing is more than income under marginal costing.

Fixed production overhead for June is $900. Units produced and sold are 600 and 450 units respectively.

Ending inventory = Units produced - Units sold

= 600 - 450

= 150 units

Fixed production overhead per unit = Total overhead/Number of units produced

= 900/600

= $1.50

Hence, fixed overhead portion in ending inventory = 150 x 1.50

= $225

Thus, income will be $225 higher under absorption costing.

Correct option is (b)

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