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Absorption and marginal costing

4.2 Changes on inventory levels

In a period where more or less inventory is produced than is sold, inventory levels will
change and the profits under marginal and absorption costing will differ.

 Marginal costing values inventory at the total variable production cost of a
unit of product while absorption costing values inventory at the full production
cost of a unit of product.

 Inventory values will be different at the beginning and end of a period under
marginal and absorption costing.

 If inventory values are different, then this will have an effect on the cost of sales
and therefore on the profits reported in the statement of profit or loss in a period
under both methods.

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