Question

Which of the following statements is correct regarding variable costing and absorption costing income statements for a company that has no beginning inventory and whose production exceeds sales for the current period?
A. Net income is higher if absorption costing is used.
B. The ending inventory amount is lower if absorption costing is used.
C. The cost of goods sold amount is lower if absorption costing is used.
D. The selling and administrative expense is higher if absorption costing is used.

Answer 1

Answer: Option (A) is correct.

A basic difference between absorption and variable costing is that the absorption costing approaches fixed factory overhead as a product cost, while variable costing approaches the same as a period cost.

Where production of inventory outpaces sales, fixed factory overhead under absorption costing approach will remain on balance sheet as unsold inventory; therefore keeping the costs off of income statement until inventory is sold. Whereas; under variable costing, fixed factory overhead will be expended to the income statement in given period .