Consider the following statements regarding absorption costing and variable costing.
i. Profit reported under absorption costing for a year will likely differ from that reported under variable costing because production and sales differ.
ii. Total profit when added together over a ten-year period will be approximately equal under absorption costing and variable costing because production and sales will be approximately the same.
iii. Total profit when added together over a ten-year period will be significantly different under absorption and variable costing because fixed costs will generally increase significantly over that long.
Which statement/s is/are true?
A) i
B) i and ii
C) i and iii
D) ii

Question

Quizplus · Accepted Answer

- Statement i is true because absorption costing includes all manufacturing costs in the cost of a product, including fixed manufacturing overhead, which is allocated to products produced. Therefore, if production exceeds sales, some of the fixed manufacturing overhead costs are deferred in inventory under absorption costing, leading to a higher profit reported than under variable costing, where only variable costs are included in product costs and fixed costs are expensed in the period incurred.- Statement ii is true because over a long period, such as ten years, the total production and sales volumes are likely to be similar, leading to the total profit reported under both costing methods being approximately equal. This is because the differences in profit reporting between the two methods in individual years (due to the timing of fixed overhead cost recognition) tend to offset each other over time.- Statement iii is incorrect because the significant difference in total profit over a long period would not be due to fixed costs increasing but rather due to how these costs are allocated between sold and unsold inventory under the two costing methods. The assumption of fixed costs generally increasing significantly over time does not directly affect the comparison of total profits between absorption and variable costing methods.

Consider the Following Statements Regarding Absorption Costing and Variable Costing