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When opening inventory was 8,500 litres and closing inventory was 6,750 litres, a firm had a profit of $62,100 using marginal costing.

Assuming that the fixed overhead absorption rate was $3 per litre, what would be the profit using absorption costing?

$______

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Chapter9AbsorptionandmarginalCosting

As inventory decreases over the period, the cost of sales will be higher with absorption costing, since they will include fixed overhead in the opening inventory now sold. The extra cost of sales (and thus reduction in profit) = (8,500 - 6,750) x $3 = $5,250.

This means that since profit will be lower with absorption costing by $5,250, the absorption costing profit will be $(62,100 - 5,250) = $56,850.

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