Question

When the number of units sold exceed the number of units produced, income reported under absorption costing will be lower than variable costing. Which of the following gives the best justification of the above statement?

A. Income under absorption costing is always less than income reported using variable costing, regardless of the number of units produced.

B. Income under absorption costing is always more than income reported using variable costing, regardless of the number of units produced.

C. The fixed overhead cost deferred in ending inventory is greater than the fixed overhead cost recognized from beginning inventory.

D. The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.

Answer 1

D The fixed overhead cost deferred in ending inventory is less than he fixed overhead cost recognised from beginning inventory

Step-by-step explanation:

Variable costing system urge that the production of goods is not possible if some fixed manufacturing costs are not incurred. consequently, fixed manufacturing overheads should be allocated to units produced and included in the product full cost so that the product selling price could cover full cost of production.

An advantage of variable cost is that it removes from profit the effect of inventory changes while full costing makes it possible to manipulate profits by unnecessary increasing stock and deliberately deferring some of the fixed overheads to the next period

Answer 2

D. The fixed overhead cost deferred in ending inventory is less than the fixed overhead cost recognized from beginning inventory.

Step-by-step explanation:

Fixed overhead costs are costs such as utility bills, taxes, insurance, salaries, and government fees, etc.

With absorption costing, the fixed overhead costs, such as marketing, were allocated to inventory, and the larger the inventory, the lower was the unit cost of that overhead. An illustration is, if a fixed cost of$2,000 is allocated to 500 units, the cost is $2000/500 per unit (I.e. 4 per unit). But if there are 4,000 units, the per-unit cost is $1