When production is less than sales for the period, absorption costing net operating income will generally be less than variable costing net operating income

Question

Quizplus · Accepted Answer

This is because absorption costing includes fixed manufacturing overhead costs in the cost of goods sold, while variable costing only includes variable manufacturing costs. Therefore, if production is less than sales, there will be some fixed manufacturing overhead costs that are not allocated to the cost of goods sold under variable costing, resulting in a higher net operating income. To reconcile the two profit figures, the difference between the fixed manufacturing overhead costs allocated to the cost of goods sold under absorption costing and the fixed manufacturing overhead costs not allocated to the cost of goods sold under variable costing needs to be added or subtracted from the absorption costing net operating income to arrive at the variable costing net operating income.

When Production Is Less Than Sales for the Period, Absorption