Fixed Overhead Treatment in Costing When Inventory Decreases

Steps:

• Identify that production < sales causes inventory to decrease.
• Recall absorption costing allocates fixed overheads to units produced and carried in inventory.
• Note marginal costing treats fixed overheads as period costs, expensed fully each period.
• Conclude that inventory decrease under absorption releases prior fixed overheads into cost of sales, increasing expenses versus marginal.

Why C is correct:

• Under absorption costing, when production < sales, fixed overheads from opening inventory are released into cost of goods sold (per absorption formula: COGS includes absorbed fixed OH per unit), raising total expenses and lowering profit compared to marginal costing.

Why the others are wrong:

• A: Profits differ due to fixed overhead absorption into inventory under absorption costing.
• B: Profit difference equals fixed overhead in change in inventory levels, not closing inventories specifically.
• D: Marginal costing reports higher profit, as it avoids releasing prior fixed overheads into COGS.

Final answer: C