Question

Why absorption income is higher than variable income when production > sales?

Answer 1

Absorption costing could result in an increase in net income if a company increases its production and its inventory. This occurs because fixed manufacturing overhead is allocated to more production units—some of which will be reported as inventory also this is because some of the fixed production over heads that had been absorbed in the inventory will be carried forward as ending inventory and reported in the balance sheet as a current asset. Hence the cost of sales will have less of some fixed production over head costs and a lower reported profit for the period end.