Assuming the LIFO inventory flow assumption, when production exceeds sales for the period, absorption costing net operating income will exceed variable costing net operating income.

Question

Quizplus · Accepted Answer

Under LIFO and when production exceeds sales, there will be more cost of goods sold charged to the income statement. Absorption costing includes fixed manufacturing overhead in the cost of goods sold, while variable costing only includes variable manufacturing costs. As a result, net operating income under absorption costing will be higher than under variable costing when production exceeds sales.

Assuming the LIFO Inventory Flow Assumption, When Production Exceeds Sales