Q-21-6RQ - Horngren'S Financial And Managerial Accounting

Question

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

Step-by-Step Solution

Answer

Answer

 

When units produced are less than units sold the operating income from the absorption method is lower than the operating income from the variable costing method.

Step 1: When units produced are less than units sold

When units produced are less than units sold, it means there is some opening balance in inventory.

Step 2: Difference in operating income

When units produced are less than units sold the operating income from the absorption method is lower than the operating income from the variable costing method because under variable costing only current period fixed manufacturing overheads were expensed, whereas absorption costing fixed manufacturing overheads of beginning inventory also expensed.