Profit under absorption costing may differ from profit determined under variable costing.How is this difference calculated?
A)Change in the quantity of all units in inventory times the relevant fixed costs per unit.
B)Change in the quantity of all units produced times the relevant fixed costs per unit.
C)Change in the quantity of all units in inventory times the relevant variable cost per unit.
D)Change in the quantity of all units produced times the relevant variable cost per unit.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are included in the cost of each unit produced and are only expensed when the units are sold. This means that the value of ending inventory includes a portion of fixed overhead costs that have not yet been expensed. In contrast, variable costing only includes variable costs in the cost of each unit produced and treats fixed overhead costs as period expenses. Therefore, the difference in profit between absorption and variable costing can be calculated by multiplying the change in the quantity of all units in inventory by the relevant fixed costs per unit. This represents the amount of fixed overhead costs that are included in the ending inventory value under absorption costing but are expensed immediately under variable costing.

Profit Under Absorption Costing May Differ from Profit Determined Under