Final answer:
When inventory decreases, COGS under absorption costing will be less than COGS under variable costing due to the allocation of fixed manufacturing costs.
Step-by-step explanation:
When inventory decreases, COGS under absorption costing will be less than COGS under variable costing. In absorption costing, fixed manufacturing costs are allocated to each unit of production, while in variable costing, only variable manufacturing costs are allocated to units produced. Therefore, when inventory decreases, more fixed manufacturing costs are expensed under absorption costing, resulting in higher COGS compared to variable costing.
For example, let's say the fixed manufacturing costs per unit are $10 and 100 units were produced. Under absorption costing, $10 x 100 = $1000 would be assigned as fixed manufacturing costs to inventory. However, if only 50 units were sold and the inventory decreased by 50 units, then $10 x 50 = $500 would be expensed as COGS under absorption costing, while under variable costing, only variable costs per unit (e.g., direct materials, direct labor) would be included in COGS.