Question

Absorption of production overhead costs on a marginal cost basis is unacceptable:

• A. As a cost control mechanism.
• B. As a decision making aid.
• C. For stock valuation in compliance with SSAP 9.
• D. For profit measurement in monthly management accounts.

Answer 1

The correct option is C For stock valuation in compliance with SSAP 9.

Absorption costing is a technique whereby each unit of output is charged with both fixed and variable production costs. The fixed production costs are treated as part of the actual production cost.

Stocks in accordance with SSAP 9 are therefore valued on a full production cost basis and held within the balance sheet until the stocks are sold, rather than charged to profit & loss account in the period in which the costs of the of the stocks are incurred.