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

Question

Quizplus · Accepted Answer

In variable costing, only variable manufacturing costs are included in the cost of goods sold. Fixed manufacturing costs are treated as period expenses and are expensed in the period incurred. As a result, if Lakota uses variable costing, its cost of goods sold will be lower since fixed manufacturing costs are excluded. This will result in a lower operating income than under absorption costing, where fixed manufacturing costs are included in the cost of goods sold. The value of ending Finished Goods Inventory reported in the balance sheet will be the same under both methods since it only represents the cost of goods produced and not the method used to calculate the cost.

In Its First Year of Business,Lakota,Inc