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A Level Accounting (9706)•9706/12/O/N/21
Question 25 from 9706/12/O/N/21

Explanation

Fixed Costs in Closing Inventory Drive Differences Steps:

  • Closing inventory units = 4000 produced - 3500 sold = 500 units.
  • Absorption costing values inventory at variable cost + fixed cost per unit; marginal costing uses only variable cost.
  • Inventory difference = 500 units × 10fixedcostperunit=10 fixed cost per unit = 10fixedcostperunit=5000 higher under absorption.
  • With production exceeding sales, absorption profit exceeds marginal profit by $5000 (fixed costs deferred in inventory).

Why A is correct:

  • Absorption costing absorbs fixed manufacturing costs into unsold inventory per standard costing principles, raising both inventory value and profit by fixed costs on closing stock when output > sales.

Why the others are wrong:

  • B: Reverses profit impact; absorption profit is higher, not lower.
  • C: Misattributes higher inventory to marginal costing and uses incorrect $500 difference.
  • D: Misattributes higher inventory to marginal costing and mismatches profit variance amount.

Final answer: A

Topic: Traditional costing methods

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