Operating income can differ materially between the results for the weighted-average and FIFO methods when:
A)direct materials or conversion costs per unit vary significantly from period to period
B)the physical inventory levels of work in process are large relative to the total number of units transferred out
C)Neither of these answers is correct.
D)Both of these answers is correct.

Question

Quizplus · Accepted Answer

Both options A and B can lead to differences in operating income between the weighted-average and FIFO methods.

Option A: If the direct materials or conversion costs per unit vary significantly from period to period, the cost of goods sold under the weighted-average method will be different from the cost of goods sold under the FIFO method because the weighted-average method uses an average cost per unit for all units sold, while the FIFO method uses the cost of the oldest units first followed by the cost of the newer units. This can result in differences in operating income.

Option B: If the physical inventory levels of work in process are large relative to the total number of units transferred out, it can be more difficult to determine which units were sold and which units are still in inventory. This can lead to differences in the cost of goods sold and the value of ending inventory between the weighted-average and FIFO methods, which can impact operating income.

Operating Income Can Differ Materially Between the Results for the Weighted-Average