Question

Explain the differences in operating incomes obtained in requirements 1 and 2. The difference in operating income under absorption costing and variable costing is 308,000 . The 2020 operating income under absorption costing is greater than the operating income under variable costing because

Answer 1

Differences in Operating Incomes Under Absorption Costing and Variable Costing:

The 2020 operating income under absorption costing is greater than the operating income under variable costing because

the ending inventory has carried over some fixed manufacturing costs, making the cost of goods sold less than under variable costing.

Step-by-step explanation:

The differences in the operating incomes obtained under variable costing and absorption costing are due to the fixed manufacturing costs that are included in the ending inventory ​and carried forward to the next accounting period while the ending inventory under variable costing does not include any fixed manufacturing costs. Absorption costing is based on full costing system but, variable costing does not include the full costs.