In the month of December the Valhalla Company produced 28,000 units and sold 30,000 units. Under absorption costing:
A) Fixed manufacturing costs will be "released" from inventory and therefore net operating income will be lower than it would under variable costing
B) Fixed selling & administrative costs will be "released" from inventory and therefore net operating income will be lower than it would under variable costing
C) Fixed manufacturing costs will be included in inventory instead of on the income statement and therefore net operating income will be higher than it would under variable costing
D) All fixed costs will be "released" from inventory and therefore net operating income will be lower than it would under variable costing

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in inventory and only "released" to the income statement when the inventory is sold. Since the company sold more units than it produced, there will be fixed manufacturing costs "released" from inventory in this period. This will result in a lower net operating income than under variable costing, which only considers variable manufacturing costs as expenses. Fixed selling and administrative costs are not affected by absorption costing and are expensed in full in the period they are incurred.

In the Month of December the Valhalla Company Produced 28,000