When inventory levels increase, absorption costing will result in a higher operating income than direct costing.
AASCB: Analytic

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to each unit of production, so when inventory levels increase, some of these costs are deferred to future periods as part of inventory, leading to higher operating income compared to direct (variable) costing where all fixed costs are expensed in the period they are incurred.

When Inventory Levels Increase, Absorption Costing Will Result in a Higher