If sales exceed production, then previous period costs will be released to the income statement and will decrease the level of absorption net income relative to variable net income.

Question

Quizplus · Accepted Answer

When sales exceed production, the company sells products that were produced in previous periods, leading to the release of fixed manufacturing costs from inventory to the income statement. This decreases absorption net income because these costs were not matched against revenues in the period they were incurred, making absorption net income lower relative to variable net income, where such costs are expensed when incurred.

If Sales Exceed Production, Then Previous Period Costs Will Be