Marginal and absorption profit compared
The two methods value unsold inventory differently, so they report different profits. Work out both and explain the gap.
Task 1Profit under marginal costing3 questions
Marginal costing values each unit at its variable cost only. All the fixed costs are charged against the profit of the month they belong to.
| Item | Figure |
|---|---|
| Candles made | 2,000 |
| Candles sold | 1,800 |
| Selling price of one candle | 15.00 |
| Variable cost of one candle | 6.00 |
| Fixed production overheads | 10,000.00 |
| Other fixed costs | 3,500.00 |
There was no inventory at the start of July. Marginal profit is the contribution from the candles sold, less all the fixed costs.
Task 2Profit under absorption costing4 questions
Task 3Why the two profits differ3 questions