ICAEW BIP · Chapter 2 · Question 7 of 12
In a period when inventory levels fall, how will reported profit under absorption costing compare with reported profit under marginal costing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Absorption costing profit will be lower
Explanation
When inventory falls, fixed production overhead carried forward from earlier periods in opening inventory is released into this period's cost of sales under absorption costing. Marginal costing charges only the current period's fixed overhead. Absorption costing profit is therefore lower, by the reduction in inventory units multiplied by the fixed overhead absorption rate.
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