Exeter Ltd. introduced a new mass-produced specialty product early in the year. Production and sales of this product for the first four months are as follows: The firm's budgeted fixed overhead is $200,000, and budgeted output is 1,000 units per month. The volume variance, if any, is carried forward month-by-month and closed at the end of the year. When 1,000 units are produced and sold, expected monthly operating profit is $40,000.
In which month(s) was variable costing profit lower than absorption costing profit?
A) 4
B) 1, 2, and 3
C) 2 and 3
D) 3 and 4

Question

Quizplus · Accepted Answer

Variable costing profit is lower than absorption costing profit when production is less than sales. In this case, production is less than sales in months 1, 2, and 3.