Under which inventory costing method could increases or decreases in operating income be misinterpreted to be the result of operating efficiencies or inefficiencies?
A)only variable costing
B)only absorption costing
C)both variable and absorption costing
D)neither variable nor absorption costing

Question

Quizplus · Accepted Answer

Under absorption costing, both fixed and variable manufacturing costs are included in the cost of inventory. Changes in inventory levels can therefore cause operating income to fluctuate due to the allocation of fixed costs, regardless of actual operating efficiencies or inefficiencies. This can lead to misinterpretation of the financial results. Variable costing, on the other hand, includes only variable costs in inventory, making it less susceptible to such misinterpretations related to inventory changes.

Under Which Inventory Costing Method Could Increases or Decreases in Operating