Fixed Overheads in Inventory Valuation

Steps:

• Marginal costing expenses all fixed overheads in the period incurred, regardless of production or sales.
• Absorption costing allocates fixed overheads to units produced, including them in inventory value.
• With ending inventory in the first year, absorption costing defers some fixed overheads to the balance sheet.
• This deferral reduces expenses in the income statement, increasing profit compared to marginal costing.

Why B is correct:

• Absorption costing includes fixed overheads in closing inventory per standard costing principles, deferring their expense and boosting reported profit when inventory rises.

Why the others are wrong:

• A: Profits differ because absorption costing capitalizes fixed overheads in inventory, while marginal does not.
• C: Absorption costing increases profit by absorbing fixed overheads into inventory, not decreasing it.
• D: No under-absorption is indicated; the scenario involves normal absorption into ending inventory.

Final answer: B