Absorption costing operating income is closer to the operating cash flow of a period than is variable costing operating income.

Question

Quizplus · Accepted Answer

Absorption costing includes fixed manufacturing overhead costs in the cost of goods sold, while variable costing only includes variable costs. This means that absorption costing operating income can be influenced by changes in inventory levels, while variable costing operating income is not. As a result, variable costing operating income is closer to the operating cash flow of a period.

Absorption Costing Operating Income Is Closer to the Operating Cash