Question

Consider the following statements about absorption- and variable-costing income:_______.

I. Yearly income reported under absorption costing will differ from income reported under variable costing if production and sales volumes differ.
II. In the long-run, total income reported under absorption costing will often be close to that reported under variable costing.
III. Differences in income under absorption and variable costing can often be reconciled by multiplying the change in inventory (in units) by the variable manufacturing overhead cost per unit.
Which of the above statements is (are) true?
A) I only.
B) II only.
C) III only.
D) I and II.
E) II and III.

Answer 1

Absorption and Variable Costing Income:

The true statements are:

D) I and II.

Step-by-step explanation:

If these two figures (production and sales volumes) are equal, the implication is that there are no beginning and ending inventories of goods. Therefore, the yearly income reported under the two costing systems will be the same.

The claim of statement II is that it is only in the long-run that the total income reported under the two systems will be close to each other. This holds true where there are beginning and ending inventories of goods as established earlier.