In its first year of business,Greenlam Inc.produced 600 units and sold 400 units.If Greenlam uses variable costing,________.
A)its operating profit for the period will be higher than absorption costing
B)its operating profit for the period will be lower than absorption costing
C)its value of ending inventory reported in the balance sheet will be higher than absorption costing
D)its operating profit will be the same under absorption costing

Question

Quizplus · Accepted Answer

With variable costing, only the variable manufacturing costs are included in the cost of goods sold, while fixed manufacturing costs are treated as a period expense. As a result, if Greenlam sold fewer units than it produced, there will be some fixed manufacturing costs included in ending inventory, which will be carried forward to the next period. This will result in a higher reported value of ending inventory and a lower cost of goods sold under absorption costing, which will lead to a higher operating profit compared to variable costing. Therefore, the operating profit will be lower under variable costing compared to absorption costing.

In Its First Year of Business,Greenlam Inc