Gomez'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

Under absorption costing, all manufacturing costs, including fixed manufacturing overhead, are included in the product cost. Therefore, when inventory increases, a portion of the fixed manufacturing overhead is deferred to future periods. This results in a higher reported income under absorption costing compared to variable costing, where fixed manufacturing overhead is treated as a period expense and is not included in the product cost.

Gomez's Inventory Increased During the Year