Suppose production is less than sales volume.What is the relationship between net income under absorption costing and profits when using variable-costing procedures?
A)Net income under absorption costing will be greater than profits when using variable costing.
B)Net income under absorption costing will be less than profits when using variable costing.
C)Net income under absorption costing will be equal to profits when using variable costing.
D)Net income under absorption costing will be randomly different from profits when using variable costing.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed overhead costs are included in the cost of each unit produced, regardless of whether they are sold or not. This means that if production is less than sales volume, the fixed overhead costs that were included in the cost of the unproduced units will be allocated to the units that were sold, resulting in a higher net income. However, under variable costing, fixed overhead costs are treated as period costs and are not included in the cost of each unit produced. As a result, net income under variable costing will be less than net income under absorption costing in this scenario. Therefore, option B is the correct choice.

Suppose Production Is Less Than Sales Volume