Calculate the overhead absorption rate.

Question

The following information is forecast for next period.
units
opening inventory 54 275
closing inventory 60 120
$
profit using marginal costing 300 600
profit using absorption costing 390 780
What is the overhead absorption rate per unit?
A $5.00 B $6.50 C $7.20 D $15.43

Answer 1

The answer is $15.42

 

I can Explain it using a hypothetical example. As its is done by working backwards. No using some standard formula. If u need i can send you the sheet of example in your email. 

. What i did is Take Difference of Profit using marginal costing and absorption costing MC profit 300,600 Ab profit 390,780 Difference 90,180 This difference represents the additional fixed cost that is absorbed in inventory under the absorption costing method. So this additional cost will decrease profit if added in opening inventory and will increase profit if added in closing inventory. So the net effect would be the amount in opening balance minus the amount in closing balance. Here we have units so we take the difference in units 5, 845 (60,120 - 54,275). Rate in this case will be = difference in profits / difference in opening and closing units = 90,180/ 5845 = 15.43