Profits Equal When Inventory Levels Are Unchanged

Steps:

• Marginal costing expenses all fixed manufacturing overheads in the period incurred.
• Absorption costing allocates fixed overheads to units produced and carries them in inventory.
• Profit difference equals fixed overhead rate times change in inventory units.
• Zero profit difference occurs only if inventory levels remain constant.

Why D is correct:

• Under absorption costing, fixed overheads are inventoried; unchanged inventory means no deferral or release of overheads, equaling marginal costing profit per the formula: Profit difference = Fixed overhead per unit × (Closing inventory - Opening inventory).

Why the others are wrong:

• A: Selling costs are period costs, treated identically in both methods and unrelated to profit difference.
• B: Selling costs' change does not affect the costing method discrepancy.
• C: Inventory increase defers fixed overheads in absorption costing, inflating its profit relative to marginal costing.

Final answer: D