Assuming that the number of units produced is less than the number of units sold,which of the following statements is true when comparing net income using absorption and variable costing?
A) Absorption costing will yield a higher net income.
B) Variable costing will yield a higher net income.
C) Net income will be the same under both methods.
D) The sales price per unit will be less using absorption costing.

Question

Quizplus · Accepted Answer

When the number of units produced is less than the number of units sold, there will be fewer units in ending inventory under absorption costing compared to variable costing. This is because absorption costing includes fixed manufacturing overhead in the cost of each unit, which is included in the ending inventory valuation, whereas variable costing only includes variable production costs in the cost of each unit. As a result, absorption costing will allocate a higher amount of fixed manufacturing overhead to cost of goods sold, resulting in a lower net income compared to variable costing. Therefore, B is the correct answer as variable costing will yield a higher net income. Option A and D do not apply in this scenario, and option C is incorrect as the net income will differ under both methods.

Assuming That the Number of Units Produced Is Less Than