When the number of units sold exceeds the number of units produced, income reported under absorption costing will be lower than variable costing. Which of the following gives the best justification of the above statement?
A) Income under absorption costing is always less than income reported using variable costing, regardless of the number of units produced.
B) Income under absorption costing is always more than income reported using variable costing, regardless of the number of units produced.
C) The fixed overhead cost deferred in ending inventory is greater than the fixed overhead cost recognized from beginning inventory.
D) The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.

Question

Quizplus · Accepted Answer

When the number of units sold exceeds the number of units produced, according to absorption costing, fixed manufacturing overhead costs are deferred in ending inventory as a part of the product cost. Therefore, the fixed overhead cost deferred in ending inventory will be greater than the fixed overhead cost recognized from beginning inventory, leading to lower income compared to variable costing. Thus, option D is the correct choice as it justifies the given statement.

When the Number of Units Sold Exceeds the Number of Units