Grey Corporation produces mattresses.If grey produces more units than it sells during a period, then reported income using absorption costing will be:
A)Equal to reported income using variable costing.
B)Greater than reported income using variable costing.
C)Less than reported income using variable costing.
D)Less than reported income using variable costing plus total fixed production costs.
E)None of the above.

Question

Quizplus · Accepted Answer

When Grey Corporation produces more units than it sells during a period, the reported income using absorption costing is greater than the reported income using variable costing. This is because under absorption costing, fixed overhead costs are included in the cost of inventory and are expensed only when the inventory is sold. Thus, when production exceeds sales, a portion of fixed overhead costs are deferred to future periods as inventory. On the other hand, variable costing treats fixed overhead costs as period costs that are expensed in the current period, regardless of inventory levels. Therefore, reported income using variable costing will be lower than reported income using absorption costing.

Grey Corporation Produces Mattresses