George Company has no beginning stock and manufactures a single product. If the number of units produced exceeds the number of units sold, then net operating income under the absorption method for the year will
A)be equal to the net operating income under variable costing.
B)be greater than the net operating income under variable costing.
C)be equal to the net operating income under variable costing plus total fixed manufacturing costs.
D)be equal to the net operating income under variable costing less total fixed manufacturing costs.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in the cost of goods sold and are matched against revenue. If the number of units produced exceeds the number of units sold, some fixed manufacturing costs will be deferred until the next period. However, under variable costing, all fixed manufacturing costs are expensed in the period incurred. As a result, if the number of units produced exceeds the number of units sold, net operating income will be higher under absorption costing than under variable costing, as some fixed manufacturing costs will be deferred to the next period. Therefore, choice B is correct.

George Company Has No Beginning Stock and Manufactures a Single