Q-21-5RQ - Horngren'S Financial And Managerial Accounting

Question

When units produced exceed units sold, how does operating income differ between variable costing and absorption costing? Why?

Step-by-Step Solution

Answer

Answer

 

Operating income under absorption costing is higher compared to variable costing because some fixed costs remain in ending inventory unexpended.

 

Step 1: When units produced exceed units sold

When units produced are not equal to units sold, it means there is some balance in ending inventory.

Step 2: Difference in operating income

When units produced exceed units sold the operating income from the absorption method is higher than the operating income from the variable costing method because under absorption costing some fixed manufacturing overhead remains unexpended and reflected in the balance sheet.