Profit Difference Due to Fixed Cost Treatment in Inventory

Steps:

• Marginal costing treats fixed costs as period expenses, ignoring inventory effects.
• Absorption costing allocates fixed costs to units produced, deferring them in inventory if unsold.
• If production exceeds sales, absorption profit exceeds marginal profit by fixed costs in closing stock.
• If sales exceed production, absorption profit is lower than marginal profit due to fixed costs released from opening stock.

Why B is correct:

• When sales exceed production, absorption costing releases more fixed costs than marginal, reducing profit relative to marginal (per absorption costing rules).

Why the others are wrong:

• A: Equal production and sales yield identical profits under both methods.
• C: Production exceeding sales increases absorption profit over marginal.
• D: No production means no fixed cost absorption, so profits align or cannot differ as described.

Final answer: B