Changes in the quantity of finished goods inventory, caused by differences in the levels of sales and production, directly affects the amount of income from operations reported under absorption costing.

Question

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Absorption costing includes fixed manufacturing overhead as part of the cost of goods sold, and any changes in the amount of finished goods inventory impact the allocation of fixed overhead costs to products. As a result, changes in finished goods inventory directly affect the amount of income reported under absorption costing.

Changes in the Quantity of Finished Goods Inventory, Caused by Differences