When a company produces more units than it sells, income under absorption costing will exceed income under variable costing.

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Absorption costing allocates fixed manufacturing overhead costs to each unit of product, regardless of whether it is sold or not. Therefore, if a company produces more units than it sells, those fixed costs are spread out over a larger number of units, resulting in a lower per-unit cost and higher reported income under absorption costing compared to variable costing which only applies fixed manufacturing overhead costs to units that are actually sold.

When a Company Produces More Units Than It Sells, Income