How will a favorable volume variance affect net income under each of the following methods?
A) reduce no effect
B) reduce increase
C) increase no effect
D) increase reduce

Question

How will a favorable volume variance affect net income under each of the following methods? 
A) reduce no effect 
B) reduce increase 
C) increase no effect 
D) increase reduce

Quizplus · Accepted Answer

A favorable volume variance means the actual volume of units sold is higher than the budgeted volume, which implies higher sales revenue. Therefore, net income will increase under absorption costing and variable costing as both methods include sales revenue in their calculation of net income. However, under absorption costing, there will be an additional increase in net income due to the fixed manufacturing overhead being absorbed into inventory when the actual volume sold exceeds the budgeted volume, whereas variable costing only considers variable costs when calculating net income.

How Will a Favorable Volume Variance Affect Net Income Under