When inventories decrease, the absorption costing income statement will report a lower net income than the net income reported under variable costing.

Question

Quizplus · Accepted Answer

With absorption costing, fixed manufacturing costs are included in the cost of goods sold and are not expensed until the inventory is sold. Therefore, when inventories decrease, a portion of those fixed costs are not expensed, resulting in a lower net income compared to variable costing which only considers variable costs in determining the cost of goods sold.

When Inventories Decrease, the Absorption Costing Income Statement Will Report