When production is more than sales,the operating income will be higher under absorption costing than variable costing.Assume zero beginning inventories.Which of the following gives the correct reason for the above statement?
A)all costs incurred have been recorded as expenses
B)a portion of the fixed manufacturing overhead is still in the ending Finished Goods Inventory account
C)all selling and administrative expenses have been recorded as period costs
D)fixed manufacturing costs have not been considered while calculating the operating profits

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold and allocated to units of product. When production exceeds sales, some of the fixed manufacturing overhead costs remain in the ending inventory account, resulting in a higher value of ending inventory and thus higher operating income under absorption costing. Variable costing, on the other hand, only includes variable manufacturing costs in the cost of goods sold and does not allocate fixed manufacturing overhead costs to units of product. Therefore, the ending inventory value is lower and the operating income is also lower under variable costing when production exceeds sales. Choice A is incorrect because regardless of the costing method, all costs incurred would be recorded as expenses. Choice C is incorrect because both absorption and variable costing separate selling and administrative expenses from the cost of goods sold. Choice D is incorrect because fixed manufacturing costs are included in the cost of goods sold under absorption costing.

When Production Is More Than Sales,the Operating Income Will Be