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Example 2
The following data is available on the production and sales for the first three years of a company’s new product.
Year 1 Year 2 Year 3
Production units 5,000 6,000 4,000
Sales units 4,000 6,000 5,000
Variable costs per unit, selling price and total fixed costs per year were constant over the three-year period. The
company is considering the use of either marginal or absorption costing.
Which of the following statements is/are true?
(1) Absorption costing will show a lower profit than marginal costing in Year 1
(2) Marginal costing will show a lower closing inventory valuation than absorption costing in Year 2
(3) Total profit over the three-year period will be the same under both methodsPlease provide the explanation and answer to this.