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Sir, If we total all the periods our production equals sales volume but I would like to ask is it pratically possible for a business and please also tell that how business manages to do so?
Sorry for asking Again.
Please don’t push for a reply – we answer within 24 hours, but we do not sit permanently at the computer 🙂
In an ideal world, a company would produce each year exactly the same number as they can sell each year – obviously producing less would mean that they would lose sales, and producing more would be a waste if they are not selling them.
In practice, a company is likely to make sure they have extra units because they can never be certain of how many they can sell. So the produce a few more to be safe and end up with having some in inventory at the end of the year.
However in the following year, since they already have some in inventory they won’t need to produce as many.In the long term they must end up producing the same as they well – for the same reasons as I have written in my second sentence above.
Sir long term means cumulation of all years(eg Year 1 to 5) or Only year 5.?
Sir Kindly tell that If opening inventory of 1st period and closing of last period is same eg in year 3 then only production equal sales and profit will be same under both techniques Absorption and Margional Costing?
Why it is so?Why we need same closing inventory in year 3 same as opening in year 1 to report same profits under two techniques…Please clarify this.
Long term means all years – not just 5 years.
With regard to the profits being the same if the opening and closing inventories stay the same – you should watch my free lectures on marginal and absorption costing. The only difference ever between marginal and absorption profits is only ever due to changes in inventory. If there are no changes in inventory then there is no difference in the profits and I explain this in the lectures.
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