Assuming that the number of units produced is less than the number of units sold, which of the following statements is true when comparing net operating income using absorption and variable costing?
A) Absorption costing will yield a higher net operating income.
B) Variable costing will yield a higher net operating income.
C) Net operating income will be the same under both methods.
D) The sales price per unit will be less using absorption costing.

Question

Quizplus · Accepted Answer

Under variable costing, only the variable manufacturing costs are included in the cost of goods sold, while fixed manufacturing costs are treated as period expenses. This means that net operating income will be higher under variable costing when the number of units produced is less than the number of units sold, since there will be less fixed manufacturing costs allocated to the cost of goods sold. This is in contrast to absorption costing, where fixed manufacturing costs are included in the cost of goods sold and can result in a lower net operating income when fewer units are produced than sold. The sales price per unit is not necessarily impacted by the choice of costing method.

Assuming That the Number of Units Produced Is Less Than