Question

Which of the following statements is true concerning income if manufacturing production exceeds units sold?A higher operating income will result under variable costingA lower operating income will result under absorption costingA higher operating income will result under absorption costingThe same operating income will result

Answer 1

A higher operating income will result under absorption costing

Step-by-step explanation:

If manufacturing production exceeds units sold there will be an increase in inventory and increases in inventory cause income to be higher under absorption costing than under variable costing.

Under variable costing, as its name suggests, only variable production costs are assigned to inventory and cost of goods sold.

Under absorption costing, normal manufacturing costs are considered product costs and included in inventory.

Recognize that a reduction in inventory during a period will cause the opposite effect.

Specifically, a portion of the contents of the beginning inventory would be transferred to expense commensurate with the decrease in inventory.

Since the inventory contains less under variable costing, expect expenses to be lower and income to be higher.