Absorption costing profit reconciliation
Absorption costing profit reconciliation explains why absorption and variable costing report different profits: the difference equals the change in inventory units multiplied by the fixed overhead rate per unit.
FrameworkAbsorption vs variable costing
See it move
Variable costing profit is €80,000. Producing 500 more units than sold defers €2,000 of fixed overhead — 500 units times €4 per unit — into ending inventory, so absorption costing reports €82,000, which is €2,000 higher purely from the inventory build-up, not from any real gain in sales performance.
The formula
Variables
- operating profit under absorption costing (€)
- operating profit under variable costing (€)
- change in inventory units during the period (positive when inventory increases) (units)
- standard fixed overhead rate per unit (budgeted fixed overhead ÷ budgeted output) (€ per unit)
When inventory rises, absorption costing defers fixed overhead into ending inventory and reports higher profit than variable costing; when inventory falls, previously deferred overhead is released and absorption profit is lower. The two methods report identical profit only when inventory is unchanged.