When monthly production volume is constant and sales volume is less than production,how will net income determined with variable costing procedures compare to net income determined with absorption costing?
A)Net income determined with variable costing will always be greater than net income determined using absorption costing.
B)Net income determined with variable costing will always be less than net income determined using absorption costing.
C)Net income determined with variable costing will be equal to net income determined using absorption costing.
D)Net income determined with variable costing will be equal to contribution margin per unit times units sold.

Question

Quizplus · Accepted Answer

When sales volume is less than production, there will be unsold units that will be carried over to the next month's inventory. Absorption costing will allocate fixed manufacturing overhead to the units in inventory, increasing the cost of goods sold and reducing net income. However, variable costing does not allocate fixed manufacturing overhead to the cost of goods sold and treats it as a period cost instead. Therefore, variable costing will result in a higher net income compared to absorption costing. Hence, option B is correct. The net income calculated using variable costing will always be less than the net income calculated using absorption costing in a situation where production volume is constant, and sales volume is less than production.

When Monthly Production Volume Is Constant and Sales Volume Is