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.
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 goods sold when products are sold. Therefore, when production is greater than sales, some of the fixed manufacturing overhead is still included in the ending inventory, which means that less of it has been expensed in the current period. This results in higher operating income under absorption costing compared to variable costing, where fixed overhead is expensed in full in the period it is incurred. Choice A is incorrect because all costs incurred are also recorded as expenses under variable costing. Choice C is irrelevant to the calculation of operating income under absorption and variable costing. Choice D is incorrect because fixed manufacturing costs are included in the cost of goods sold under absorption costing.

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