Net operating income reported under absorption costing will exceed net operating
ID: 2399505 • Letter: N
Question
Net operating income reported under absorption costing will exceed net operating income reported under variable costing for a given period if:
production equals sales for that period.
production exceeds sales for that period.
sales exceed production for that period.
the variable manufacturing overhead exceeds the fixed manufacturing overhead.
a.production equals sales for that period.
b.production exceeds sales for that period.
c.sales exceed production for that period.
d.the variable manufacturing overhead exceeds the fixed manufacturing overhead.
Explanation / Answer
Correct answer is b. production exceeds sales for that period
In case of production exceeding the sales, there will be ending inventory. In absorption costing,the fixed manufacturing overhead is allocated to current year cost as well as the ending inventory. In case of variable costing, full fixed manufacturing overhead is charged to income statement. Hence, net income under absorption costing is more than the net income under variable costing.