7.4 Reconciling profits
　　If inventory levels increase between the beginning and end of a period, absorption costing will report the higher profit. This is because some of the fixed production overheads incurred during the period will be carried forward in closing inventory （which reduces cost of sales） to be set against sales revenue in the following period instead of being written off in full against profit in the period concerned.
　　If inventory levels decrease, absorption costing will report the lower profit because as well as the fixed overhead incurred, fixed production overhead which had been carried forward in opening inventory is released and is also included in cost of sales.
　　Continue with Example 4
　　$
　　Marginal cost profit 　　　　　　　　　　　　　　　26,640
　　Adjust for fixed overhead included in inventory
　　Inventory increase of 40000 units x $1.25　　　　　　 50
　　Absorption costing profit 　　　　　　　　　　　　　26,690
　　Example 6:
　　When opening inventories were 8500 litres and closing inventories 6750 litres, a firm had a profit of $62100 using marginal costing.
　　Assuming that the fixed overhead absorption rate was $3 per litre, what would be the profit using absorption costing?
　　A. $41,850
　　B. $56,850
　　C. $67,350
　　D. $82,350
　　Solution:
　　Difference in profit = （8500 – 6750） x $3/litre = $5,250
　　Since inventory levels reduced, the absorption costing profit will be lower than the marginal costing profit.
　　Absorption costing profit = $62100 - $5250 = $56850
 
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