Differences between absorption costing and variable costing are much smaller when a:
A)large part of the manufacturing process is subcontracted out
B)just-in-time inventory strategy is implemented
C)significant portion of manufacturing costs are fixed
D)Both A and B are correct.

Question

Quizplus · Accepted Answer

Option A is correct because when a large part of the manufacturing process is subcontracted out, the fixed manufacturing overhead costs are likely to be lower or at least more variable in nature, reducing the differences between absorption costing and variable costing.

Option B is correct because just-in-time inventory strategy reduces the level of inventory at the end of the period, reducing the difference in inventory valuation between absorption costing and variable costing.

Option C is incorrect because significant fixed costs in the production process create a bigger difference between absorption costing and variable costing due to the allocation of fixed overhead costs to each unit produced.

Therefore, option D is the best choice as both A and B provide conditions that reduce the differences in costing methods.

Differences Between Absorption Costing and Variable Costing Are Much Smaller