In general, if inventory increases during an accounting period, ________.
A) variable costing will report less operating income than absorption costing
B) absorption costing will report less operating income than variable costing
C) variable costing and absorption costing will report the same operating income
D) both variable costing and absorption costing will show losses

Question

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in product costs. Fixed manufacturing overhead is expensed in the period incurred. Under absorption costing, both variable and fixed manufacturing costs are included in product costs. When inventory increases, absorption costing allocates some of the fixed manufacturing costs to the increased inventory, deferring these costs to future periods when the inventory is sold. This results in higher operating income under absorption costing compared to variable costing, where the fixed costs are expensed in the period incurred regardless of changes in inventory levels.

In General, If Inventory Increases During an Accounting Period, ________