When production is greater than sales,the operating income will be higher under absorption costing than variable costing.Assume zero beginning and ending 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 under absorption costing.
C) All selling and administrative expenses have been recorded as period costs.
D) Fixed manufacturing costs have not been considered when calculating the operating profits.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead is included in the cost of the product and is only expensed when the product is sold. Therefore, if production exceeds sales, a portion of the fixed manufacturing overhead will still be included in the ending Finished Goods Inventory account, increasing the operating income. Under variable costing, fixed manufacturing overhead is expensed as period costs and is not included in the cost of the product, so the operating income would not be affected by the level of production. Choices A, C, and D are incorrect because they do not provide a valid explanation for the difference in operating income between absorption and variable costing.

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