Question：PH Ltd produces a single product and currently uses absorption costing for its internal management accounting reports. The fixed production overhead absorption rate is $34 per unit. Opening inventories for the year were 100 units and closing inventories were 180 units. The company's management accountant is considering a switch to marginal costing as the inventory valuation basis.
If marginal costing were used, the marginal costing profit for the year, compared with the profit calculated by absorption costing, would be which of the following?
A. $2,720 lower
B. $2,720 higher
C. $3,400 lower
D. $3,400 higher
The correct answer is:$2,720 lower
解析：If marginal costing is used to value inventory instead of absorption costing, the difference in profits will be equal to the change in inventory volume multiplied by the fixed production overhead absorption rate = 80 units x $34 = $2,720
Since closing inventory are higher than opening inventories, the marginal costing profit will be lower that the absorption costing profit (so $2,720 higher is incorrect). This is because the marginal costing profit does not 'benefit' from the increase in the amount of fixed production overhead taken to inventory (rather than to the income statement).
If you selected $3,400 lower or $3,400 higher you based the difference on 100 units of opening inventory.
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