When sales exceed production and the company uses the LIFO inventory flow assumption, the net operating income reported under variable costing generally will be:
A) less than net operating income reported under absorption costing.
B) greater than net operating income reported under absorption costing.
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.

Question

Quizplus · Accepted Answer

Under variable costing, only variable production costs are included in product costs, while fixed manufacturing overhead is expensed in the period incurred. When sales exceed production, inventory levels decrease, and under LIFO, the older, higher-cost inventory is expensed, leading to lower cost of goods sold and higher net operating income compared to absorption costing, which includes fixed overhead in inventory costs.

When Sales Exceed Production and the Company Uses the LIFO