When the number of units sold exceed the number of units produced,income reported under absorption costing will be lower than variable costing.Which of the following gives the best justification of the above statement?
A)Income under absorption costing is always less than income reported using variable costing,regardless of the number of units produced.
B)Income under absorption costing is always more than income reported using variable costing,regardless of the number of units produced.
C)The fixed overhead cost deferred in ending inventory is greater than the fixed overhead cost recognized from beginning inventory.
D)The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.
E)Fixed overhead is treated as a period cost under absorption costing.

Question

Quizplus · Accepted Answer

When the number of units sold exceed the number of units produced, absorption costing will result in higher ending inventory and deferred fixed overhead costs. This means that the fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory. As a result, more fixed overhead costs are expensed under absorption costing, leading to lower reported income compared to variable costing.

When the Number of Units Sold Exceed the Number of Units