Under which of the following conditions is net income higher under absorption costing (relative to variable costing)?
A)Current period production exceeds sales.
B)Inventory is reduced during the current period.
C)Sales prices are rising.
D)Net income is higher under absorption costing under all conditions.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to each unit of production. Therefore, when production exceeds sales, some of these costs are deferred in inventory rather than being expensed in the current period. This deferral of expense increases net income under absorption costing compared to variable costing, where all fixed manufacturing overhead costs are expensed in the period they are incurred, regardless of the level of sales.

Under Which of the Following Conditions Is Net Income Higher