George Corporation has no beginning inventory and manufactures a single product. If the number of units produced exceeds the number of units sold, then net operating income under the absorption method for the year will:
A)be equal to the net operating income under variable costing.
B)be greater than the 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, whereas they are treated as period costs under variable costing. Therefore, if the number of units produced exceeds the number of units sold, some of the fixed costs will be allocated to units that are still in inventory. This will result in a higher cost of goods sold and lower net operating income under variable costing compared to absorption costing. Therefore, the net operating income under absorption costing will be greater than the net operating income under variable costing.

George Corporation Has No Beginning Inventory and Manufactures a Single