If the unit level of inventory increases during an accounting period, then ________.
A) less operating income will be reported under absorption costing than variable costing
B) more operating income will be reported under absorption costing than variable costing
C) operating income will be the same under absorption costing and variable costing
D) the exact effect on operating income cannot be determined

Question

Quizplus · Accepted Answer

When the unit level of inventory increases during an accounting period, under absorption costing more operating income will be reported compared to variable costing. This is because absorption costing includes fixed manufacturing overhead costs in the cost of inventory, which are deferred to future periods when the inventory is sold. On the other hand, variable costing only includes variable manufacturing costs in the cost of inventory, which are expensed immediately as cost of goods sold. Therefore, with an increase in inventory level, a larger proportion of fixed manufacturing overhead costs are allocated to inventory under absorption costing, resulting in higher reported operating income.

If the Unit Level of Inventory Increases During an Accounting