Chu Enterprise's inventory increased during the year.On the basis of this information, income reported under absorption costing:
A)will be the same as that reported under variable costing.
B)will be higher than that reported under variable costing.
C)will be lower than that reported under variable costing.
D)will differ from that reported under variable costing, the direction of which cannot be determined from
E)will be less than that reported in the previous period.

Question

Quizplus · Accepted Answer

Under absorption costing, all costs (including fixed manufacturing overhead) are allocated to the units produced, meaning that inventory increases will result in a higher reported income. Variable costing only considers the variable costs of production, so inventory increases have no effect on reported income. Therefore, income reported under absorption costing will be higher than that reported under variable costing.

Chu Enterprise's Inventory Increased During the Year