The following information pertains to Stark Corporation:

-Refer to Figure 8-9. Absorption costing income would be ____ the variable costing income.
A) $50,000 greater than
B) $70,000 greater than
C) $70,000 less than
D) $50,000 less than

Question

The following information pertains to Stark Corporation:
 
-Refer to Figure 8-9. Absorption costing income would be ____ the variable costing income.
A) $50,000 greater than 
B) $70,000 greater than 
C) $70,000 less than 
D) $50,000 less than

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is allocated to the cost of each unit produced, which is then included in inventory costs until the goods are sold. If more units are produced than sold, as often happens, the income reported under absorption costing will be higher than under variable costing, which treats all fixed manufacturing overhead as a period expense. The specific dollar amount difference would depend on the details provided in Figure 8-9, which are not available in this text. However, the general principle is that absorption costing can lead to higher reported income compared to variable costing when inventory levels increase.

The Following Information Pertains to Stark Corporation