Please help?

Re:Please help?

When there is a change in the volume of closing stock the two different costing methods will have different profits.

Marginal costing values closing stock at variable cost per unit.
Absorption costing values closing stock at absorption cost per unit.

So when the opening stock is lower than the closing stock the absoption costing approach has a lower cost of sales and a higher profit.

Take a simple example:

Cat Ltd produces a product A80

In May 2007 they had no opening stock
They produced 3000
They sold 2700

Price per unit £50
Variable cost per unit £20
Fixed Overhead absorbed per unit £10 (total £30,000)

Under marginal costing
Profit calc
Sales Revenuec 2700 x £50 = £135,000

Variable cost of production-
ccccccccccccccccc3000 x £20 = £60,000
Closing stock ccccccc300 x £20 = £6,000
Variable cost of sales-
cccccccccccccccccc2700 x £20 = £54,000
Contribution cccccc2,700 x £30 = £81,000

Fixed Costs ccccccccccccccccccc£30,000
Profit cccccccccccccccccccccccccc£51,000

Re:Please help?

The difference between the two profits is entirely due to the different value of the closing stock.

Where £3000 of overheads have been absorbed into the closing stock, the cost of sales has been reduced by that amount and the profit increased.