Assume that the predetermined fixed overhead rate per unit remains the same from 2007 to 2008 and inventory decreases in 2008. Which of the following statements is true?
A) The fixed overhead expended in 2008 under variable costing will be greater than that expended under absorption costing.
B) The fixed overhead expended in 2008 under absorption costing will be greater than that expended under variable costing.
C) The amount of fixed overhead expended will be the same under both methods.
D) It is impossible to determine what effect the decrease in inventory will have on net profit under absorption costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead is included in the cost of goods sold and is only recognized as an expense when the inventory is sold. Therefore, a decrease in inventory will result in less fixed overhead being expensed in the current period, leading to lower cost of goods sold and higher net income. In contrast, under variable costing, fixed overhead is expensed in the period incurred, regardless of whether the inventory is sold or not. Therefore, the decrease in inventory will not have any impact on the fixed overhead expended in 2008. Hence, the fixed overhead expended in 2008 under absorption costing will be greater than that expended under variable costing.

Assume That the Predetermined Fixed Overhead Rate Per Unit Remains