Changes in the quantity of finished goods inventory, caused by differences in the levels of sales and production, directly affect the amount of operating income reported under absorption costing.

Question

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Under absorption costing, all manufacturing costs (including fixed manufacturing overhead) are assigned to the products. Therefore, when the quantity of finished goods inventory changes due to differences in sales and production levels, the amount of fixed manufacturing overhead costs allocated to sold and unsold units changes, directly affecting the reported operating income.

Changes in the Quantity of Finished Goods Inventory, Caused by Differences