Section A

A public utility company manufacturing solar panels produced 10,000 units but only sold 8,000 units during the period. Fixed production overheads are significant.

How will the profit calculated under absorption costing compare to the profit under marginal costing?

Under absorption costing, fixed production overheads are absorbed into product costs. When production exceeds sales, closing inventory increases. The fixed overheads attached to the unsold units are carried forward to the next period in the inventory valuation, reducing the cost of sales in the current period and thereby resulting in a higher profit compared to marginal costing (which writes off all fixed overheads as period costs immediately).