When production is less than sales volume, net income under absorption costing will be ____ profits using variable costing procedures.
A)greater than
B)less than
C)equal to
D)randomly different than

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold. Therefore, if production is less than sales volume, some fixed manufacturing overhead costs will not be allocated to products sold and will be carried forward as inventory for the following period. This will result in a higher net income under absorption costing than under variable costing. However, under variable costing, fixed manufacturing overhead costs are treated as period expenses and are not allocated to products. Therefore, net income under variable costing will not be affected by the change in inventory levels caused by production being less than sales volume. As a result, net income under absorption costing will be higher than net income under variable costing, making option B the correct choice.

When Production Is Less Than Sales Volume, Net Income Under