question

You will know from my lectures that the difference between the two profits is only ever equal to the change in inventory multiplied by the fixed overheads per unit. Here the difference between the profits is $5,000. Therefore the inventory must have increased by 5,000/2 = 2,500 units. Since they sold 10,000 units, they must have produced 10,000 + 2,500 = 12,500 units.

We only include production overheads in the value of inventory. With marginal costing we only include variable production overheads, with absorption costing we include both fixed and variable production overheads. The costing method used affects both the opening and closing inventories. If inventories increase then absorption costing gives a higher profit, whereas if inventories decrease over the period then marginal costing gives a higher profit. Look again at page 43 of the free lecture notes and do watch again the lectures on this chapter.