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Determine Profit by Using Absorption Costing
Assuming the fixed overhead absorption rate was Ksh.3 per litre, then what would be the profit utilizing absorption costing?
a) Ksh.41, 850
b) Ksh.56, 850
c) Ksh.67, 350
d) Ksh.82, 350
Solution
Stock levels reduced; consequently the absorption costing profit would be lower. So you can remove options (c) and (d).
Difference in profit = (8,500 - 6,750) x Ksh.3
= Ksh.5, 250
Absorption costing profit = Ksh.62, 100 - Ksh.5, 250
= Ksh.56,850
The right answer is (b)
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