Question

hen using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:

Answer 1

When using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to the products sold.

What happens when production is greater than sales?

• Because it allocates fixed overhead expenses to each unit of a product produced throughout the time, absorption costing differs from variable costing.
• Net income recorded under absorption costing will be higher than net income reported under variable costing when production exceeds sales. Closing stocks rise under absorption costs as output outpaces sales.
• When output exceeds the number of units sold, absorption costing allocates fixed overhead to the items sold, resulting in net income that is higher than that determined by variable costing.
• The operating income under absorption costing is higher when production outpaces sales, i.e. when final inventory exceeds beginning inventory.

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