National Mixing is a division of National Chemicals, a large diversified chemical company. National Mixing (NM) provides mixing services for both outside customers and other National divisions. NM buys or receives liquid chemicals and combines and packages them according to the customer’s specifications. NM computes its divisional net income on both a fully absorbed and variable costing basis. For the year just ending, it reported:

Overhead is assigned to products using machine hours.
There is no finished goods inventory at NM, only work-in-process (WIP) inventory. As soon as a product is completed, it is shipped to the customer. The beginning inventory was valued at \($6.3\) million and contained 70,000 machine hours. The ending WIP inventory was valued at \($9.9\) million and contained 90,000 machine hours.
Write a short, non-technical note to senior management explaining why the net profit amounts under variable costing and absorption costing differ.

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Net Profit Absorption costing Variable costing Difference $13,800,000 12,600,000 $ 1,200,000