Question

12) When the number of units produced is less than the number of units sold, how...

12) When the number of units produced is less than the number of units sold, how does operating

income under variable costing differ from operating income under absorption costing?

A) It is lower than operating income under absorption costing.

B) It is higher than operating income under absorption costing.

C) It is the same as operating income under absorption costing.

D) It depends upon the amount of decline.

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Answer #1

Under variable costing method only variable manufacturing costs are included in the computation of product cost but in absorption costing method both fixed and variable manufacturing costs are included in the computation of product cost.

If the units produced are less than the units sold, absorption costing method will have higher amount of costs and the net operating income will be lower. It is so because the additional cost of units carried forward from previous accounting period will also incur in this method. In variable costing only the fixed manufacturing cost will incur even if the units sold are higher.

Hence under variable costing method operating income is higher in the given scenario.

Correct answer is b.

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