If the number of units sold exceeds the number of units produced, how is operating income affected?
A) Operating income would be the same under both a variable costing and absorption costing income statement.
B) Operating income would be lower under a variable costing income statement.
C) Operating income would be higher under an absorption costing income statement.
D) Operating income would be higher under a variable costing income statement.

Question

Quizplus · Accepted Answer

Under variable costing, only the variable manufacturing costs are included in the cost of goods sold. Therefore, if the number of units sold exceeds the number of units produced, there would be fewer fixed manufacturing costs allocated to each unit sold, resulting in higher operating income. On the other hand, under absorption costing, fixed manufacturing overhead costs are allocated to each unit produced, regardless of whether the unit is sold or remains in inventory. Therefore, if the number of units sold exceeds the number of units produced, there would be more fixed manufacturing costs allocated to each unit sold, resulting in lower operating income.

If the Number of Units Sold Exceeds the Number of Units