Greenlam Inc.started the year with 200 units in the Finished Goods Inventory account.It produced 600 units during the year and sold 800 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

Variable costing only includes variable manufacturing costs in the cost of goods sold, while absorption costing includes both variable and fixed manufacturing costs. Since Greenlam sold more units than it produced, its ending inventory will be lower under variable costing than absorption costing. This will result in a higher operating profit under variable costing.