Question

Operating income determined using absorption costing can be reconciled to operating income determined using variable costing by computing the difference between which of the following?

Select one:

a. Gross margin (absorption costing method) and contribution margin (variable costing method).cross out

b. Discretionary costs included in the beginning and ending inventories.cross out

c. Sales as recorded under the variable costing method and sales as recorded under the absorption costing method.cross out

d. Fixed manufacturing overhead costs deferred in or released from inventories.

Answer 1

· Correct Answer = Option ‘D’

Operating income determined using absorption costing can be reconciled to operating income determined using variable costing by computing the difference between “Fixed manufacturing overhead costs deferred in or released from inventories”

· This is because, under variable costing, TOTAL fixed manufacturing overhead is considered as period cost.

· However, under Absorption costing, TOTAL Fixed manufacturing overhead is ABSORBED to units sold, while some of this gets deferred in ending inventory.