At the end of the accounting period, Armstrong Corporation reports operating income of $30,000. Which of the following statements is true, if Armstrong'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 since the cost of goods sold is the same.
D) Variable costing and absorption costing will report the same operating income since the total costs are the same.

Question

Quizplus · Accepted Answer

When inventory levels decrease during the accounting period, absorption costing will report less operating income than variable costing. This is because under absorption costing, fixed manufacturing overhead is allocated to the cost of goods sold and ending inventory. If inventory decreases, more of the fixed manufacturing overhead costs are included in the cost of goods sold, reducing operating income compared to variable costing, which treats fixed manufacturing overhead as a period cost and does not allocate it to inventory.

At the End of the Accounting Period, Armstrong Corporation Reports