Garcia'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, fixed manufacturing overhead costs are allocated to the units produced. Therefore, if inventory increases during the year, a portion of these fixed costs will be deferred to the next period when the inventory is eventually sold. This deferral results in a higher reported income under absorption costing compared to variable costing, which only includes variable costs directly related to the production of units sold.

Garcia's Inventory Increased During the Year