Marginal and Absorption Costing: Practice Questions

If a company's production volume is greater than its sales volume in a given period, how will the operating profit under absorption costing compare to that under marginal costing?

A company is evaluating a special order for 500 units at a price of $$40 per unit. This order will not affect its normal sales, and current production capacity is sufficient. The variable manufacturing cost is $$28 per unit. Fixed manufacturing overhead is $$100,000 for normal production of 10,000 units. Variable selling costs specifically for special orders are $$2 per unit, while fixed selling and administrative costs are irrelevant to this decision.

What is the incremental profit from accepting this special order, using a marginal costing approach to decision making?

In a period where the opening inventory was 2,000 units and the closing inventory was 1,500 units, how would the profit under absorption costing compare to the profit under marginal costing?

In marginal costing, which of the following costs is treated as a period cost?

In a period where sales volume exceeds production volume, which of the following statements is true regarding operating profit under marginal costing and absorption costing?

State whether the valuation of closing finished goods inventory will be higher under absorption costing or marginal costing when production units exceed sales units during a period, and briefly explain why.

If a company always sells all units it produces in a period, will there be any difference in the reported net profit between marginal costing and absorption costing? Briefly explain.

In a period where a company's production volume is higher than its sales volume, explain why the closing inventory value under absorption costing would be higher than under marginal costing.

Marginal costing and absorption costing provide different perspectives on product cost and profitability.

(a) State two specific costs that are included in the product cost under absorption costing but excluded from the product cost under marginal costing.

(b) Explain why a manager might prefer to use marginal costing data rather than absorption costing data when deciding whether to accept a large special order at a discounted price.

(c) If a company experiences an unusually large, unexpected decline in sales volume while maintaining production levels, explain the impact on the reported operating profit under absorption costing relative to marginal costing for that period, assuming fixed overheads remain constant.