When more units are sold than produced,operating income is less under absorption costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the product cost and become a part of inventory until the product is sold. Therefore, if more units are sold than produced, some of the fixed manufacturing costs allocated to the units sold would not have been absorbed by the inventory and would reduce the operating income. This is not the case under variable costing, where fixed manufacturing costs are expensed in the period they are incurred.

When More Units Are Sold Than Produced,operating Income Is Less