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This video summarizes the ways in which operating profit (or loss) differs based on whether Absorption Costing or Variable Costing is used.

If the company produces more units than it sells, then operating profit will be higher under Absorption Costing (compared to Variable Costing). This is because inventory increases and, with Absorption Costing, some of the fixed manufacturing overhead is deferred to a future period (this reduces expenses and thereby increases operating profit in the current period).

If the company produces fewer units than it sells, then operating profit will be lower under Absorption Costing (compared to Variable Costing). This is because inventory decreases, and under Absorption Costing, some of the fixed manufacturing overhead that had been deferred from prior periods is expensed in the current period (this increases expenses and thereby reduces operating profit).

If the number of units produced is equal to the number of units sold, operating profit will be the same whether Absorption Costing or Variable Costing is used.