When inventories decrease,the absorption costing income statement will report lower net income than reported under variable costing.

Question

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Absorption costing includes fixed manufacturing overhead in the cost of goods sold, whereas variable costing only includes variable manufacturing costs. When inventories decrease, absorption costing will recognize less fixed overhead as an expense compared to variable costing, resulting in a lower cost of goods sold and higher net income under variable costing.

When Inventories Decrease,the Absorption Costing Income Statement Will Report Lower