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In a given period, the production level of an item exactly matches the level of sales.
How would the profit differ if marginal or absorption costing was used?A There would not be a difference
B It would be higher under absorption costing
C It would be lower under absorption costing
D It would be impossible to determine given the informationAnswer is A.
My question is that it is not mentioning anything regarding opening or closing stock so why we are considering it to be zero. “D” should be more preferred answer.As I explain in my free lectures, the difference in profits depends on the change in the inventory over the period.
If the level of sales is the same as the level of production, then the level of inventory will be the same at the beginning and end of the period. So it will not change and so the profits will be the same.
It is irrelevant what the actual level of inventory is – all the matters is that it will not change.
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