Where the fixed overhead rate in both opening and closing inventories is the same, which of the following statements is correct?
A) If inventory remains the same, absorption costing profit will be greater than variable costing profit.
B) If inventory has decreased, absorption costing profit will be greater than variable costing profit.
C) Absorption costing profit is always greater than variable costing profit.
D) If inventory has increased, absorption costing profit will be greater than variable costing profit.

Question

Quizplus · Accepted Answer

Under absorption costing, all manufacturing costs including fixed overheads are allocated to the product. If inventory increases, more fixed overheads are allocated to the inventory and less to the cost of goods sold, leading to a higher profit compared to variable costing, where fixed overheads are expensed in the period they are incurred.

Where the Fixed Overhead Rate in Both Opening and Closing