If inventory has grown, operating income will be higher under variable costing than it is under absorption costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of inventory and are expensed only when the inventory is sold. Therefore, if inventory increases, more fixed manufacturing costs get deferred to future periods and decrease current period operating income. Under variable costing, fixed manufacturing costs are expensed in the period incurred and are not included in the cost of inventory. Therefore, if inventory increases, it does not impact current period operating income. In fact, variable costing operating income may decrease if inventory decreases due to the fixed manufacturing costs being spread over fewer units sold.

If Inventory Has Grown, Operating Income Will Be Higher Under