When there are zero units in Beginning Finished Goods Inventory and the units produced are more than the units sold, the income will be lower under variable costing than under absorption costing.

Question

Quizplus · Accepted Answer

This is because under variable costing, fixed manufacturing costs are treated as period costs and are expensed in the period incurred rather than being allocated to the units produced. Therefore, with zero Beginning Finished Goods Inventory, all fixed manufacturing costs will be expensed in the current period, resulting in a lower income. However, under absorption costing, fixed manufacturing costs are allocated to the units produced regardless of inventory levels, resulting in a higher income.

When There Are Zero Units in Beginning Finished Goods Inventory