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Why is it that when inventory is increasing, absorption costing gives a higher profit than marginal costing?
And why is it when inventory is decreasing, absorption costing gives lower profit than marginal costing?
Please I’ve seen the video tutorials and I’m still stuck..
Thanks
With absorption costing, some of the fixed overheads are included in the valuation of inventory. Therefore, if inventories increase more of the fixed overheads are included in inventory and less is actually charged during the period. With marginal costing, all of the fixed overheads are charged in the period. Therefore absorption costing results in a higher profit when inventories increase.
I do suggest that you watch all of the marginal and absorption costing lectures again, because I do explain this and illustrate the effect with examples.
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