When production quantity exceeds sales, throughput costing results in reporting lower operating income than variable costing.

Question

Quizplus · Accepted Answer

Throughput costing only includes production costs that are directly related to the creation of a product, such as direct materials and direct labor. Fixed overhead costs, which are not directly tied to production quantities, are not included. As a result, when production exceeds sales, the fixed overhead costs are allocated to fewer units, resulting in a higher per unit cost and lower operating income under throughput costing compared to variable costing, which includes all production costs in its calculation.

When Production Quantity Exceeds Sales, Throughput Costing Results in Reporting