Question

Business A began business in the current year and uses variable costing. It produced 12,000 units...

Business A began business in the current year and uses variable costing. It produced 12,000 units and sold 11,000 units therefore

its value of ending finished goods inventory reported in the balance sheet will be higher than under absorption costing

its operating income for the period will be higher than under absorption costing.

its operating income for the period will be lower than under absorption costing.

its operating income will be the same under both absorption costing and variable costing.
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Answer #1

Answer is option third - its operating income for the period will be lower than under absorption costing.

When units sold are lesser than units produced:

Under absorption costing fixed manufacturing overhead is treated as part of unit cost, due to this value of ending inventory and operating income will be higher. Whereas fixed manufacturing overhead under variable costing method is treated as an expense, due to this the ending inventory and operating income will be lower than absorption costing method.

Hence, option third is correct and other options are wrong.

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