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

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Absorption costing includes all manufacturing costs, including fixed overheads, in the cost of goods sold. As a result, changes in inventory levels (i.e. the difference between sales and production) will affect the amount of fixed overhead costs that are included in the cost of goods sold and, therefore, the amount of income from operations reported under absorption costing.

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