If the number of units produced exceeds the number of units sold,then net operating income under absorption costing will:
A)be equal to the net operating income under variable costing.
B)be greater than net operating income under variable costing.
C)be equal to the net operating income under variable costing plus total fixed manufacturing costs.
D)be equal to the net operating income under variable costing less total fixed manufacturing costs.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of goods sold and are only expensed when the product is sold. Therefore, when the number of units produced exceeds the number of units sold, the fixed manufacturing costs related to the unsold units are deferred to a future period. This results in a higher net operating income compared to variable costing, where fixed manufacturing costs are expensed in the period incurred regardless of whether the products are sold or not. Thus, net operating income under absorption costing will be greater than net operating income under variable costing when the number of units produced exceeds the number of units sold.

If the Number of Units Produced Exceeds the Number of Units