Period-to-period changes in operating income under absorption costing are driven by variations in both the unit level of sales and the unit level of production.

Question

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Under absorption costing, operating income is impacted by changes in unit level of production because fixed manufacturing overhead costs are included in the cost of each unit produced. The level of sales also impacts operating income because it determines how many units are sold and the corresponding revenue generated. Therefore, both production and sales levels can affect changes in operating income under absorption costing.

Period-To-Period Changes in Operating Income Under Absorption Costing Are Driven