Net income reported under absorption costing will exceed net income reported under variable costing for a given period if:
A)Production equals sales for that period.
B)Production exceeds sales for that period.
C)Sales exceed production for that period.
D)The variable overhead exceeds the fixed overhead.

Question

Quizplus · Accepted Answer

When production exceeds sales under the absorption cost method, the unsold (ending) inventory contains part of the fixed cost of the period which, along with other inventory costs, are deferred to the next period. Under the variable costing method, all fixed costs are charged to the current period. Therefore, when production exceeds sales and results in unsold inventory, net income reported under absorption costing will exceed the net income reported under variable costing for the period.

Net Income Reported Under Absorption Costing Will Exceed Net Income