The level of inventory on hand at the end of the year does not affect the amount of operating income calculated under variable costing and absorption costing.

Question

Quizplus · Accepted Answer

The level of inventory on hand at the end of the year affects the amount of operating income calculated under absorption costing, but not under variable costing. This is because absorption costing includes fixed manufacturing overhead costs in the cost of units produced, which means that the amount of operating income will be lower if there is unsold inventory on hand (since those fixed costs will be included in the ending inventory balance). In contrast, variable costing only includes variable manufacturing costs in the cost of units produced, so the amount of operating income is not affected by changes in inventory levels.

The Level of Inventory on Hand at the End of the Year