When production volume exceeds sales volume,net income will be higher when using absorption costing than when using variable costing.

Question

Quizplus · Accepted Answer

This is because absorption costing includes fixed manufacturing overhead as part of the cost of each unit produced, and the excess production will still increase the total amount of fixed overhead allocated to those units. This will result in a lower per-unit cost under absorption costing compared to variable costing, which only includes variable manufacturing costs in the cost of each unit produced. As a result, the higher net income generated by the excess production will be spread across more units under absorption costing, resulting in a higher overall net income compared to variable costing.

When Production Volume Exceeds Sales Volume,net Income Will Be Higher