Crossbow Corp.produces a single product.Data concerning June's operations follow: For the year in question, net operating income under variable costing will be:
A)higher than net operating income under absorption costing.
B)lower than net operating income under absorption costing.
C)the same as net operating income under absorption costing.
D)The relation between absorption costing and variable costing net operating income cannot be determineD.Because production exceeds sales, the net operating income for variable costing will be lower than for absorption costing.This occurs because under absorption costing, some of the fixed manufacturing overhead cost is deferred in ending inventories.

Question

Crossbow Corp.produces a single product.Data concerning June's operations follow:  For the year in question, net operating income under variable costing will be:
A)higher than net operating income under absorption costing. 
B)lower than net operating income under absorption costing. 
C)the same as net operating income under absorption costing. 
D)The relation between absorption costing and variable costing net operating income cannot be determineD.Because production exceeds sales, the net operating income for variable costing will be lower than for absorption costing.This occurs because under absorption costing, some of the fixed manufacturing overhead cost is deferred in ending inventories.

Quizplus · Accepted Answer

Since production exceeds sales, there will be an increase in ending inventory under absorption costing. This means that fixed manufacturing costs will be deferred to the next period, resulting in a higher net operating income under absorption costing. However, under variable costing, fixed manufacturing overhead costs are treated as period costs and are expensed in the current period, resulting in a lower net operating income compared to absorption costing. Hence, net operating income under variable costing will be lower than net operating income under absorption costing.