Question

When viewed over the long term, cumulative net operating income will be the same for variable and absorption costing if ending inventories exceed beginning inventories. True False

Answer 1

False.

Both the methods, namely Variable costing method and absorption costing methods are different from each other. So, the results produced by each of them will be different.

Variable costing deals with all the direct costs hence it is also called as direct costing or marginal costing. On the other hand, absorption costing deals with all types of cost viz. direct and indirect costs, hence it is also termed as traditional costing.

Thus, in variable costing fixed costs are treated as periodic costs and not included in product cost whereas, absorption costing includes fixed costs in the product costs. As a result of this, net operating income under variable costing is lower as compared to absorption costing.

So even in long term, cumulative net operating income will be lower when variable costing method is used.