Marginal costing and absorption costing

Topic 25: Marginal Costing and Absorption Costing — 50 Hard MCQs

1. A business produces 10 000 units and sells 8000 units. Variable production cost is $12 per unit. Fixed production overhead is $60 000.

What is the value of closing inventory under absorption costing?

A $24 000
B $30 000
C $36 000
D $60 000

2. Using the information in Question 1, what is the value of closing inventory under marginal costing?

A $12 000
B $24 000
C $36 000
D $60 000

3. Using the information in Question 1, which statement about profit is correct?

A absorption costing profit is $12 000 higher
B marginal costing profit is $12 000 higher
C both profits are equal
D absorption costing profit is $60 000 higher

4. A business produces 12 000 units and sells 15 000 units. Opening inventory was 3000 units. Fixed production overhead absorbed in opening inventory was $5 per unit.

Which statement is correct?

A absorption costing profit is $15 000 higher
B marginal costing profit is $15 000 higher
C both profits are equal
D absorption costing profit is $5000 higher

5. Selling price is $40 per unit. Variable production cost is $18 per unit and variable selling cost is $4 per unit.

What is contribution per unit?

A $18
B $22
C $36
D $40

6. A business sells 10 000 units at $40 each. Variable production cost is $18 per unit, variable selling cost is $4 per unit, fixed production overhead is $80 000 and fixed selling costs are $30 000.

What is profit under marginal costing?

A $40 000
B $70 000
C $180 000
D $290 000

7. A business has sales of $500 000, variable costs of $320 000 and fixed costs of $120 000.

What is contribution?

A $60 000
B $180 000
C $320 000
D $380 000

8. Budgeted fixed production overhead is $180 000 and budgeted output is 30 000 units.

What is the fixed production overhead absorption rate per unit?

A $5
B $6
C $30
D $180 000

9. Fixed production overhead absorption rate is $8 per unit. Actual output is 15 000 units. Actual fixed production overhead is $124 000.

What is the under- or over-absorption?

A $4000 under-absorbed
B $4000 over-absorbed
C $120 000 under-absorbed
D $124 000 over-absorbed

10. Fixed production overhead absorption rate is $9 per unit. Actual output is 18 000 units. Actual fixed production overhead is $156 000.

What is the under- or over-absorption?

A $6000 under-absorbed
B $6000 over-absorbed
C $162 000 under-absorbed
D $156 000 over-absorbed

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A business produces 9000 units and sells 8000 units. Selling price is $50 per unit. Variable production cost is $20 per unit. Fixed production overhead absorption rate is $6 per unit. Fixed selling and administration costs are $70 000. Actual fixed production overhead equals absorbed overhead.

What is profit under absorption costing?

A $110 000
B $116 000
C $122 000
D $192 000

12. Using the information in Question 11, what is profit under marginal costing?

A $110 000
B $116 000
C $122 000
D $240 000

13. Using the information in Question 11, why is absorption costing profit higher than marginal costing profit?

A fixed selling costs are ignored under absorption costing
B fixed production overhead is carried forward in closing inventory
C variable production cost is treated as fixed
D sales revenue is higher under absorption costing

14. Budgeted fixed production overhead is $150 000 and budgeted output is 30 000 units. Actual output is 28 000 units and actual fixed production overhead is $142 000.

What is the under- or over-absorption?

A $2000 under-absorbed
B $2000 over-absorbed
C $10 000 under-absorbed
D $10 000 over-absorbed

15. Budgeted fixed production overhead is $150 000 and budgeted output is 30 000 units. Actual output is 28 000 units and actual fixed production overhead is $136 000.

How is the under- or over-absorption treated?

A $4000 under-absorbed, deducted from profit
B $4000 over-absorbed, added to profit
C $14 000 under-absorbed, deducted from profit
D $14 000 over-absorbed, added to profit

16. Under marginal costing, fixed production overhead is treated as:

A a product cost included in inventory
B a period cost charged in full to the income statement
C a direct material cost
D a variable cost per unit

17. Under absorption costing, fixed production overhead is treated as:

A a product cost included in inventory
B a selling expense only
C a finance cost
D a cost ignored until cash is paid

18. Which cost is included in inventory valuation under absorption costing but excluded under marginal costing?

A direct material
B direct labour
C variable production overhead
D fixed production overhead

19. Which cost is excluded from inventory valuation under both marginal and absorption costing?

A direct material
B direct labour
C factory rent
D selling commission

20. A business uses marginal costing. Which statement is correct?

A closing inventory includes fixed production overhead
B contribution is calculated as sales minus variable costs
C gross profit is calculated before contribution
D fixed production overhead is absorbed into units produced

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. Selling price is $25 per unit. Variable cost is $15 per unit. Fixed costs are $80 000.

What is the break-even point in units?

A 3200 units
B 5333 units
C 8000 units
D 10 000 units

22. Using the information in Question 21, if actual sales are 12 000 units, what is the margin of safety in units?

A 2000 units
B 4000 units
C 8000 units
D 12 000 units

23. Using the information in Question 21, how many units must be sold to earn a profit of $30 000?

A 8000 units
B 9000 units
C 11 000 units
D 13 000 units

24. Using the information in Question 21, what sales revenue is required to earn a profit of $30 000?

A $200 000
B $250 000
C $275 000
D $325 000

25. Using the information in Question 21, what is the contribution to sales ratio?

A 25%
B 40%
C 60%
D 66.67%

26. Using the information in Question 21, what is break-even revenue?

A $80 000
B $120 000
C $200 000
D $250 000

27. Using the information in Question 21, if variable cost rises by $2 per unit, what is the new break-even point?

A 8000 units
B 8889 units
C 10 000 units
D 13 333 units

28. Using the information in Question 21, if fixed costs rise by $20 000, what is the new break-even point?

A 8000 units
B 9000 units
C 10 000 units
D 12 000 units

29. Selling price is reduced to $23 per unit. Variable cost remains $15 per unit. Fixed costs are $80 000.

How many units must be sold to earn a profit of $40 000?

A 10 000 units
B 12 500 units
C 15 000 units
D 20 000 units

30. A business has a limiting factor of material.

Product	Contribution per unit	Material per unit
A	$20	4 kg
B	$15	2 kg
C	$18	3 kg

Which product should be prioritised?

A A
B B
C C
D all equally

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. Opening inventory is 1000 units and closing inventory is 3000 units. Fixed production overhead absorption rate is $8 per unit.

Which statement is correct?

A absorption costing profit is $16 000 higher than marginal costing profit
B marginal costing profit is $16 000 higher than absorption costing profit
C absorption costing profit is $8000 lower than marginal costing profit
D both profits are equal

32. Opening inventory is 5000 units and closing inventory is 2000 units. Fixed production overhead absorption rate is $6 per unit.

Which statement is correct?

A absorption costing profit is $18 000 higher
B marginal costing profit is $18 000 higher
C absorption costing profit is $6000 higher
D both profits are equal

33. Marginal costing profit is $74 000. Opening inventory is 2000 units and closing inventory is 3500 units. Fixed production overhead absorption rate is $4 per unit.

What is absorption costing profit?

A $68 000
B $74 000
C $80 000
D $88 000

34. Absorption costing profit is $90 000. Opening inventory is 4000 units and closing inventory is 1000 units. Fixed production overhead absorption rate is $5 per unit.

What is marginal costing profit?

A $75 000
B $90 000
C $105 000
D $110 000

35. A business produces 20 000 units and sells 18 000 units. Fixed production overhead is $100 000. There is no opening inventory.

Which statement is correct?

A absorption costing profit is $10 000 higher
B marginal costing profit is $10 000 higher
C absorption costing profit is $5000 lower
D both profits are equal

36. A business produces 16 000 units and sells 19 000 units. Opening inventory was 3000 units. The fixed production overhead included in opening inventory was $7 per unit. There is no closing inventory.

Which statement is correct?

A absorption costing profit is $21 000 higher
B marginal costing profit is $21 000 higher
C absorption costing profit is $7000 higher
D both profits are equal

37. If production equals sales and there is no opening or closing inventory, which statement is correct?

A absorption costing profit is always higher
B marginal costing profit is always higher
C profits are normally equal if there is no under- or over-absorption
D absorption costing ignores fixed production overhead

38. Which costing method requires adjustment for under- or over-absorbed fixed production overhead?

A marginal costing only
B absorption costing only
C both methods
D neither method

39. Which statement best explains why marginal costing is useful for short-term decisions?

A it treats all costs as fixed
B it separates variable costs from fixed costs and focuses on contribution
C it includes fixed overhead in inventory
D it always gives higher profit than absorption costing

40. Which statement best explains why absorption costing is used for inventory valuation?

A it includes all production costs in product cost
B it excludes direct labour from product cost
C it treats all selling costs as assets
D it ignores factory overheads

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A company budgeted fixed production overhead of $180 000 and budgeted output of 30 000 units. Actual production was 28 000 units and actual sales were 26 000 units. Variable production cost was $9 per unit. Selling price was $25 per unit. Fixed selling and administration costs were $40 000. Actual fixed production overhead was $170 000. There was no opening inventory.

What is profit under absorption costing?

A $206 000
B $212 000
C $218 000
D $224 000

42. Using the information in Question 41, what is profit under marginal costing?

A $206 000
B $212 000
C $218 000
D $224 000

43. Using the information in Question 41, by how much does absorption costing profit differ from marginal costing profit?

A absorption costing profit is $12 000 higher
B marginal costing profit is $12 000 higher
C absorption costing profit is $2000 lower
D both profits are equal

44. A company budgeted fixed production overhead of $96 000 and budgeted output of 12 000 units. Actual production was 10 000 units and actual sales were 11 000 units. Opening inventory was 1000 units. Variable production cost was $14 per unit. Selling price was $35 per unit. Actual fixed production overhead was $90 000. Fixed selling costs were $20 000. There was no closing inventory.

What is profit under absorption costing?

A $105 000
B $113 000
C $121 000
D $131 000

45. Using the information in Question 44, what is profit under marginal costing?

A $105 000
B $113 000
C $121 000
D $131 000

46. Using the information in Question 44, which statement is correct?

A absorption costing profit is $8000 higher
B marginal costing profit is $8000 higher
C absorption costing profit is $10 000 higher
D both profits are equal

47. Budgeted production overhead is $240 000 based on 60 000 direct labour hours. A job uses 140 direct labour hours.

What fixed production overhead is absorbed into the job?

A $140
B $420
C $560
D $240 000

48. A product has direct material $18 per unit, direct labour $12 per unit, variable production overhead $5 per unit, fixed production overhead absorption rate $7 per unit and variable selling cost $3 per unit.

What is marginal product cost per unit?

A $30
B $35
C $38
D $42

49. Using the information in Question 48, what is absorption product cost per unit?

A $35
B $38
C $42
D $45

50. Using the information in Question 48, if the selling price is $60 per unit, what is contribution per unit?

A $18
B $22
C $25
D $42

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. C — $36 000

• Closing inventory = 10 000 – 8000 = 2000 units

• Fixed production overhead per unit = 60 000 / 10 000 = $6

• Absorption cost per unit = variable production cost + fixed production overhead

• = 12 + 6 = $18

• Closing inventory = 2000 × 18

• = $36 000

2. B — $24 000

• Under marginal costing, inventory includes variable production cost only.

• Closing inventory = 2000 units

• Variable production cost per unit = $12

• Closing inventory = 2000 × 12

• = $24 000

3. A — absorption costing profit is $12 000 higher

• Closing inventory increased by 2000 units.

• Fixed production overhead in closing inventory = 2000 × $6

• = $12 000

• Absorption costing carries this cost forward in inventory.

• Therefore, absorption costing profit is $12 000 higher.

4. B — marginal costing profit is $15 000 higher

• Opening inventory = 3000 units

• Closing inventory = 0 units

• Inventory decreased by 3000 units.

• Fixed production overhead released from opening inventory = 3000 × $5

• = $15 000

• Absorption costing charges this extra fixed overhead to profit, so marginal costing profit is $15 000 higher.

5. A — $18

• Contribution per unit = selling price – variable costs per unit

• = 40 – 18 – 4

• = $18

6. B — $70 000

• Contribution per unit = 40 – 18 – 4 = $18

• Total contribution = 10 000 × 18 = $180 000

• Fixed costs = 80 000 + 30 000 = $110 000

• Profit = 180 000 – 110 000

• = $70 000

7. B — $180 000

• Contribution = sales – variable costs

• = 500 000 – 320 000

• = $180 000

8. B — $6

• Fixed production overhead absorption rate = budgeted fixed production overhead / budgeted output

• = 180 000 / 30 000

• = $6 per unit

9. A — $4000 under-absorbed

• Overhead absorbed = 15 000 × 8 = $120 000

• Actual fixed production overhead = $124 000

• Actual overhead is higher than absorbed overhead.

• Under-absorbed = 124 000 – 120 000

• = $4000

10. B — $6000 over-absorbed

• Overhead absorbed = 18 000 × 9 = $162 000

• Actual fixed production overhead = $156 000

• Absorbed overhead is higher than actual overhead.

• Over-absorbed = 162 000 – 156 000

• = $6000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. C — $122 000

• Absorption cost per unit = variable production cost + fixed production overhead

• = 20 + 6 = $26

• Sales = 8000 × 50 = $400 000

• Cost of goods sold = 8000 × 26 = $208 000

• Gross profit = 400 000 – 208 000 = $192 000

• Less fixed selling and administration costs = $70 000

• Profit = 192 000 – 70 000

• = $122 000

12. B — $116 000

• Contribution per unit = 50 – 20 = $30

• Total contribution = 8000 × 30 = $240 000

• Fixed production overhead = 9000 × 6 = $54 000

• Fixed selling and administration costs = $70 000

• Profit = 240 000 – 54 000 – 70 000

• = $116 000

13. B — fixed production overhead is carried forward in closing inventory

• Production is greater than sales.

• Closing inventory increases.

• Under absorption costing, part of fixed production overhead is included in closing inventory.

• This delays the expense, so absorption profit is higher.

14. A — $2000 under-absorbed

• Absorption rate = 150 000 / 30 000 = $5 per unit

• Overhead absorbed = 28 000 × 5 = $140 000

• Actual overhead = $142 000

• Under-absorbed = 142 000 – 140 000

• = $2000

15. B — $4000 over-absorbed, added to profit

• Absorption rate = 150 000 / 30 000 = $5 per unit

• Overhead absorbed = 28 000 × 5 = $140 000

• Actual overhead = $136 000

• Over-absorbed = 140 000 – 136 000

• = $4000

• Over-absorbed overhead is added to profit.

16. B — a period cost charged in full to the income statement

• Under marginal costing, fixed production overhead is not included in inventory.

• It is charged in full in the period incurred.

17. A — a product cost included in inventory

• Under absorption costing, fixed production overhead is absorbed into units produced.

• Unsold units carry part of fixed production overhead in closing inventory.

18. D — fixed production overhead

• Both methods include variable production costs in inventory.

• Only absorption costing includes fixed production overhead in inventory.

19. D — selling commission

• Selling commission is a selling cost.

• It is not a production cost.

• It is excluded from inventory under both marginal and absorption costing.

20. B — contribution is calculated as sales minus variable costs

• Marginal costing focuses on contribution.

• Contribution = sales – variable costs.

• Fixed costs are then deducted from contribution.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. C — 8000 units

• Contribution per unit = 25 – 15 = $10

• Break-even point = fixed costs / contribution per unit

• = 80 000 / 10

• = 8000 units

22. B — 4000 units

• Actual sales = 12 000 units

• Break-even sales = 8000 units

• Margin of safety = 12 000 – 8000

• = 4000 units

23. C — 11 000 units

• Required sales units = fixed costs + target profit / contribution per unit

• = (80 000 + 30 000) / 10

• = 11 000 units

24. C — $275 000

• Required units = 11 000 units

• Selling price = $25

• Required revenue = 11 000 × 25

• = $275 000

25. B — 40%

• Contribution per unit = $10

• Selling price = $25

• Contribution to sales ratio = 10 / 25 × 100

• = 40%

26. C — $200 000

• Break-even revenue = fixed costs / contribution to sales ratio

• = 80 000 / 40%

• = $200 000

27. C — 10 000 units

• New variable cost = 15 + 2 = $17

• New contribution per unit = 25 – 17 = $8

• Break-even point = 80 000 / 8

• = 10 000 units

28. C — 10 000 units

• New fixed costs = 80 000 + 20 000 = $100 000

• Contribution per unit = $10

• Break-even point = 100 000 / 10

• = 10 000 units

29. C — 15 000 units

• New contribution per unit = 23 – 15 = $8

• Required units = fixed costs + target profit / contribution per unit

• = (80 000 + 40 000) / 8

• = 15 000 units

30. B — B

• Contribution per kg:

  • A = 20 / 4 = $5 per kg

  • B = 15 / 2 = $7.50 per kg

  • C = 18 / 3 = $6 per kg

• Product B gives the highest contribution per kg of material.

• Prioritise B.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A — absorption costing profit is $16 000 higher than marginal costing profit

• Closing inventory increased by 3000 – 1000 = 2000 units

• Fixed overhead per unit = $8

• Difference in profit = 2000 × 8

• = $16 000

• Inventory increased, so absorption profit is higher.

32. B — marginal costing profit is $18 000 higher

• Inventory decreased by 5000 – 2000 = 3000 units

• Fixed overhead per unit = $6

• Difference = 3000 × 6

• = $18 000

• Inventory decreased, so marginal profit is higher.

33. C — $80 000

• Closing inventory exceeds opening inventory by 3500 – 2000 = 1500 units

• Fixed overhead carried forward = 1500 × 4 = $6000

• Absorption costing profit = marginal costing profit + 6000

• = 74 000 + 6000

• = $80 000

34. C — $105 000

• Opening inventory exceeds closing inventory by 4000 – 1000 = 3000 units

• Fixed overhead released = 3000 × 5 = $15 000

• Marginal costing profit is higher.

• Marginal costing profit = 90 000 + 15 000

• = $105 000

35. A — absorption costing profit is $10 000 higher

• Fixed production overhead per unit = 100 000 / 20 000 = $5

• Closing inventory = 20 000 – 18 000 = 2000 units

• Fixed overhead in closing inventory = 2000 × 5 = $10 000

• Absorption profit is $10 000 higher.

36. B — marginal costing profit is $21 000 higher

• Opening inventory = 3000 units

• Closing inventory = 0

• Fixed overhead in opening inventory = 3000 × 7 = $21 000

• Absorption costing releases this cost into the current period.

• Marginal costing profit is $21 000 higher.

37. C — profits are normally equal if there is no under- or over-absorption

• If production equals sales, there is no change in inventory.

• No fixed production overhead is shifted between periods.

• Therefore, both profits are normally equal.

38. B — absorption costing only

• Under- or over-absorption occurs because absorption costing uses predetermined overhead absorption rates.

• Marginal costing does not absorb fixed production overhead into units.

39. B — it separates variable costs from fixed costs and focuses on contribution

• Marginal costing is useful for short-term decisions because it shows contribution.

• Contribution helps with break-even, limiting factor and target profit decisions.

40. A — it includes all production costs in product cost

• Absorption costing includes:

  • direct materials

  • direct labour

  • variable production overhead

  • fixed production overhead

• This is why it is used for inventory valuation.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. C — $218 000

• Fixed overhead absorption rate = 180 000 / 30 000 = $6 per unit

• Absorption cost per unit = 9 + 6 = $15

• Sales = 26 000 × 25 = $650 000

• Cost of goods sold = 26 000 × 15 = $390 000

• Gross profit = 650 000 – 390 000 = $260 000

• Less fixed selling and administration costs = $40 000

• Profit before overhead adjustment = $220 000

• Overhead absorbed = 28 000 × 6 = $168 000

• Actual fixed production overhead = $170 000

• Under-absorbed overhead = $2000

• Final profit = 220 000 – 2000

• = $218 000

42. A — $206 000

• Contribution per unit = 25 – 9 = $16

• Total contribution = 26 000 × 16 = $416 000

• Less actual fixed production overhead = $170 000

• Less fixed selling and administration costs = $40 000

• Profit = 416 000 – 170 000 – 40 000

• = $206 000

43. A — absorption costing profit is $12 000 higher

• Absorption profit = $218 000

• Marginal profit = $206 000

• Difference = $12 000

• Closing inventory = 28 000 – 26 000 = 2000 units

• Fixed overhead carried forward = 2000 × $6 = $12 000

• Absorption profit is higher.

44. B — $113 000

• Fixed overhead absorption rate = 96 000 / 12 000 = $8 per unit

• Absorption product cost per unit = 14 + 8 = $22

• Sales = 11 000 × 35 = $385 000

• Cost of goods sold = 11 000 × 22 = $242 000

• Gross profit = 385 000 – 242 000 = $143 000

• Less fixed selling costs = $20 000

• Profit before overhead adjustment = $123 000

• Overhead absorbed = 10 000 × 8 = $80 000

• Actual fixed production overhead = $90 000

• Under-absorbed overhead = $10 000

• Profit = 123 000 – 10 000

• = $113 000

45. C — $121 000

• Contribution per unit = 35 – 14 = $21

• Total contribution = 11 000 × 21 = $231 000

• Less actual fixed production overhead = $90 000

• Less fixed selling costs = $20 000

• Profit = 231 000 – 90 000 – 20 000

• = $121 000

46. B — marginal costing profit is $8000 higher

• Marginal costing profit = $121 000

• Absorption costing profit = $113 000

• Difference = $8000

• Opening inventory fixed overhead released under absorption costing = 1000 × $8 = $8000

• Inventory decreased, so marginal costing profit is higher.

47. C — $560

• Overhead absorption rate = 240 000 / 60 000 direct labour hours

• = $4 per direct labour hour

• Job overhead absorbed = 140 × 4

• = $560

48. B — $35

• Marginal product cost includes variable production costs only:

  • direct material = $18

  • direct labour = $12

  • variable production overhead = $5

• Marginal product cost = 18 + 12 + 5

• = $35

49. C — $42

• Absorption product cost includes:

  • direct material = $18

  • direct labour = $12

  • variable production overhead = $5

  • fixed production overhead = $7

• Absorption product cost = 18 + 12 + 5 + 7

• = $42

50. B — $22

• Contribution per unit = selling price – all variable costs

• Variable costs:

  • direct material = $18

  • direct labour = $12

  • variable production overhead = $5

  • variable selling cost = $3

• Contribution = 60 – 18 – 12 – 5 – 3

• = $22

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.