Feldspar,Inc.started the year with 200 units in the Finished Goods Inventory account.It produced 600 units during the year and sold 800 units.If Feldspar uses variable costing,________.
A) its operating income for the period will be higher than under absorption costing
B) its operating income for the period will be lower than under absorption costing
C) its value of ending Finished Goods Inventory reported in the balance sheet will be higher than under absorption costing
D) its operating income will be the same as under absorption costing

Question

Quizplus · Accepted Answer

Variable costing only includes variable manufacturing costs in the cost of goods sold, while absorption costing includes both variable and fixed manufacturing costs. Since Feldspar sold more units than it produced, its ending Finished Goods Inventory will be lower under variable costing than under absorption costing. This will result in a higher cost of goods sold under variable costing, and thus a lower operating income.