When the balance in ending finished goods inventory increases,net income under absorption costing
A) is lower than under direct costing.
B) is higher than under direct costing.
C) is the same under direct costing.
D) is unaffected by the increase.

Question

Quizplus · Accepted Answer

Under absorption costing, the cost of goods sold includes both variable and fixed manufacturing overhead costs, while under direct costing, only variable manufacturing costs are included. As a result, when the ending finished goods inventory increases, more fixed manufacturing overhead costs are included in the cost of goods sold, which leads to a lower net income under direct costing compared to absorption costing. Therefore, net income under absorption costing is higher than under direct costing.

When the Balance in Ending Finished Goods Inventory Increases,net Income