One possible means of determining the difference between operating incomes for absorption costing and variable costing is by ________.
A) subtracting sales of the previous period from sales of this period
B) subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory
C) multiplying the number of units produced by the budgeted fixed manufacturing cost rate
D) adding fixed manufacturing costs to the production-volume variance

Question

Quizplus · Accepted Answer

The difference in operating incomes between absorption costing and variable costing can be determined by subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory. This is because absorption costing includes fixed manufacturing overhead as part of the cost of each unit produced, while variable costing treats fixed manufacturing overhead as a period cost that is expensed in the period incurred. Therefore, changes in the level of ending inventory under absorption costing will affect reported income, whereas changes in ending inventory under variable costing will not. By comparing the change in fixed manufacturing overhead between the beginning and ending inventory levels, we can isolate the impact of absorption costing on reported income.

One Possible Means of Determining the Difference Between Operating Incomes