If the finished goods inventory increases during the period,the reported net income will be larger under direct costing than under absorption costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold, while under direct costing, they are treated as period expenses. When finished goods inventory increases, it means some of the fixed manufacturing overhead costs have been deferred to a future period under absorption costing. This deferral results in lower cost of goods sold and higher net income under absorption costing compared to direct costing.

If the Finished Goods Inventory Increases During the Period,the Reported