At the end of the accounting period Bumsted Corporation reports operating income of $30,000. If Bumstead's inventory levels decrease during the accounting period
A)variable costing will report less operating income than absorption costing.
B)absorption costing will report less operating income than variable costing.
C)variable costing and absorption costing will report the same operating income.
D)None of the above are correct.

Question

Quizplus · Accepted Answer

If Bumstead's inventory levels decrease during the accounting period, absorption costing will report less operating income than variable costing because absorption costing includes fixed manufacturing overhead costs in the cost of goods sold, while variable costing only includes variable manufacturing costs. As inventory levels decrease, more fixed manufacturing overhead costs will be expensed under absorption costing, resulting in a lower reported operating income compared to variable costing.

At the End of the Accounting Period Bumsted Corporation Reports