When a company produces more units than it sells, absorption costing operating income will be higher than variable costing operating income.

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Quizplus · Accepted Answer

In absorption costing, fixed manufacturing overhead costs are allocated to each unit of production, meaning that when more units are produced than sold, the fixed costs are spread over a larger number of units, resulting in a lower fixed cost allocation per unit and higher operating income. In contrast, in variable costing, fixed manufacturing overhead costs are considered period expenses and are not allocated to units of production, so the higher production volume does not result in lower fixed cost allocation per unit and operating income remains the same.

When a Company Produces More Units Than It Sells, Absorption