1 D Fixed overheads were under absorbed by £3,000, this being partly the difference between

budgeted and actual expenditure and partly the production shortfall of 1,000 units.
Overhead absorption rate = £150,000/30,000 = £5 per unit
£
Absorbed overhead (29,000 units x £5) 145,000
Actual overheads 148,000
Under-absorbed overhead 3,000
The effect of the production shortfall was partly offset by the difference between budgeted and
actual expenditure.
2 C £2,250.00
When expenditures are as budgeted, but actual and budgeted production activity levels are
different, only fixed overhead can be under or over absorbed.
Over-absorbed overhead = 500 hrs x £4.50
= £2,250
Variable overhead absorbed = (500 x £3.00) = £1,500 more than budgeted in the original budget.
However, variable overhead incurred would be £1,500 more as well, leaving neither under nor
over absorbed variable overheads.
3 D £28.75 per hour
£
Actual overheads incurred 480,000
Over absorbed overheads 95,000
Overheads absorbed 575,000
Overhead absorption rate = £575,000 / 20,000
= £28.75 per hour
If you selected a rate of £19.25 you deducted the over absorbed overheads from the actual
overheads to derive the amount absorbed. However, if the overhead is over absorbed then the
amount absorbed must be greater than the actual overhead incurred.
4 D £113,250
£
Gross profit (16,000 units x £(24.00 – 8.50 – 2.50)) 208,000
Selling costs (16,000 units x £6) (96,000)
112,000

Over absorbed fixed production costs

(16,400 units produced – 15,900 budgeted) x £2.50 1,250

Absorption costing profit 113,250

If you answered £110,750 you deducted the over absorption instead of adding it to the calculated
profit. The option of £112,000 makes no allowance for the over absorption and £112,250 is the
marginal costing profit for the quarter.
5 A less operating profit than the absorption costing method
If the number of units in inventory increased then with absorption costing more fixed overhead
will be carried forward in inventory to the next period. Thus operating profits will be higher than
with the marginal costing method.
6 B £10,000 lower
The marginal costing profit is lower because with absorption costing some of the fixed
production costs would be carried forward in the inventory valuation.
Profit difference = 250 units in inventory x (£30,000 / 750)
= £10,000
If you calculated the profit difference as £22,500 you included the fixed selling costs. However,
selling costs are not included in the inventory valuation, which should include production costs
only.
7 B £75,800
Decrease in inventory levels = 760 – 320
= 440 units
Difference in profits = 440 x £5 fixed overhead per unit
= £2,200
Inventories decreased, therefore the absorption costing profit would be lower as overheads are
'released' from inventory.
Absorption costing profit = £78,000 - £2,200
= £75,800
If you selected options A or C you based your calculation of the profit difference on only the
opening inventory or closing inventory respectively.
If you selected option D you calculated the correct profit difference, but you added it, instead of
subtracting it from the marginal costing profit.

8 B £22,291 higher
Adam Ltd's production is budgeted to exceed sales and therefore under
absorption costing the closing inventory of (7,500 – 6,600) units carried
forward to the next period would include fixed production costs. These
amount to:
(900 × (£185,760/ 7,500)) = £22,291
Under marginal costing these fixed costs would be charged against the
revenue for the period. Thus the absorption costing profit would be
£22,291 higher.
If you selected £104,803 higher or lower you calculated the profit
difference as the total production cost of the 900 units in closing
inventory. However, the difference in inventory valuation is caused by the
differing treatment of the fixed costs only.
9 A £113,376
 £  
Gross profit (38,400 units × £(10.00 – 3.54 – 1.04))   208,128
Selling costs (38,400 units × £2.50)  (96,000)
 112,128
 Over-absorbed fixed production costs
   (39,360 units produced – 38,160 budgeted) × £1.04       1,248
Absorption costing profit  113,376
If you answered £110,880 you deducted the over-absorption instead of adding it to the calculated
profit. The option of £112,128 makes no allowance for the over-absorption and £112,378 is the
marginal costing profit for the year.

10 D £7,430 higher
Eve Ltd's production is budgeted to exceed sales and therefore under absorption costing the
closing inventory of (2,500 – 2,200) units carried forward to the next period would include fixed
production costs. These amount to:
(300 × (£61,920/2,500)) = £7,430
Under marginal costing these fixed costs would be charged against the revenue for the period.
Thus the absorption costing profit would be £7,430 higher.
If you selected £34,934 higher or lower you calculated the profit difference as the total
production cost of the 300 units in closing inventory. However, the difference in inventory
valuation is caused by the differing treatment of the fixed costs only.
11 C £3.60
Decrease in inventory levels = 4,500 – 1,500
= 3,000 units
Difference in profits = £126,100 – £115,300
= £10,800
Fixed overhead per unit = £10,800/3,000
= £3.60 per unit
12 C £181,920
Decrease in inventory levels = 1,000 – 560
= 440 units
Difference in profits = 440 × £12 fixed overhead per unit
= £5,280
Inventories decreased, therefore the absorption costing profit would be lower as overheads are
'released' from inventory.
Absorption costing profit = £187,200 – £5,280
= £181,920
If you selected £175,200 you based your calculation of the profit difference using the opening
inventory.
If you selected £180,480 you based your calculation of the profit difference using the closing
inventory.
If you selected £192,480 you calculated the correct profit difference, but you added it, instead of
subtracting it from the marginal costing profit.
13 A
14 D