How will net income react using the variable costing method, assuming monthly production volume is constant but fewer items are sold during the period than are produced in that same period?
A) Net income will be equal to contribution margin per unit times units sold.
B) Net income will be equal to net income determined using the absorption costing method.
C) Net income will be less than net income determined using the absorption costing method.
D) Net income will be greater than net income determined using the absorption costing method.

Question

Quizplus · Accepted Answer

With the variable costing method, fixed manufacturing costs are expensed in the period they are incurred instead of being allocated to units produced. Therefore, if fewer items are sold than produced in a period, the fixed manufacturing costs will not be allocated to those unsold units and will be expensed as period costs. This will result in lower net income compared to the absorption costing method, which allocates fixed manufacturing costs to all units produced, regardless of whether they are sold or not. Therefore, net income will be less than net income determined using the absorption costing method.

How Will Net Income React Using the Variable Costing Method