When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold and are only expensed when a unit is sold. If units produced exceed units sold, some of these fixed costs will be deferred to future periods and will be included in inventory. This results in a higher inventory value and a higher income under absorption costing compared to variable costing, where fixed manufacturing overhead is expensed in the period incurred.

When Units Produced Exceed Units Sold, Income Under Absorption Costing