Chu Enterprise's inventory increased during the year. On the basis of this information, income reported under absorption costing:
A) will be the same as that reported under variable costing.
B) will be higher than that reported under variable costing.
C) will be lower than that reported under variable costing.
D) will differ from that reported under variable costing, the direction of which cannot be determined from the information given.
E) will be less than that reported in the previous period.

Question

Quizplus · Accepted Answer

When inventory increases, absorption costing includes fixed manufacturing overhead in the cost of the inventory, deferring some of the expense to when the inventory is sold. Under variable costing, all fixed manufacturing overhead is expensed in the period it is incurred. Therefore, income reported under absorption costing will be higher than that reported under variable costing because some of the fixed costs are included in the inventory value and not expensed immediately.

Chu Enterprise's Inventory Increased During the Year