Question

In general, if inventory increases during an accounting period, ________.

		absorption costing will report less operating income than variable costing
		variable costing will report less operating income than absorption costing
		variable costing and absorption costing will report the same operating income
		both variable costing and absorption costing will show losses

Answer 1

Your required answer is option B i.e. Variable costing will report less operating income than absorption costing.

Explanation:

Under variable costing only direct material, direct labor and variable overhead is considered as a cost of product whereas in absorption costing all expenses are considered as a cost of product and therefore if the inventory increases during an accounting period then the variable costing will report less operating income then absorption costing.

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