Variable costing will produce a larger operating income than absorption costing if:
A)Fixed overhead decreases
B)Production exceeds sales
C)Fixed overhead increases
D)Sales exceed production

Question

Quizplus · Accepted Answer

Under variable costing, fixed overhead costs are treated as period costs and are not included in the cost of goods sold. Instead, they are expensed in the period in which they are incurred. As a result, if sales exceed production, less inventory is carried forward to the next period and fewer fixed overhead costs are expensed in the current period. This leads to a larger operating income under variable costing compared to absorption costing, where fixed overhead is included in the cost of goods sold even if the corresponding inventory is not sold. Therefore, choice D is correct.

Variable Costing Will Produce a Larger Operating Income Than Absorption