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

Question

Quizplus · Accepted Answer

Under variable costing, only variable manufacturing costs are included in the cost of goods sold calculation, whereas under absorption costing both variable and fixed manufacturing costs are included. If inventory decreases, there will be fewer fixed manufacturing costs deferred to future periods under absorption costing compared to variable costing, resulting in higher operating income under variable costing.

If Inventory Has Declined, Operating Income Will Be Higher Under