Questions:
In its first year of business, Lakota, Inc. produced 600 units and sold 400 units. If Lakota uses variable costing, ________.
A) its operating income for the period will be lower than under absorption costing
B) its value of ending Finished Goods Inventory reported in the balance sheet will be higher than under absorption costing
C.) its operating income will be the same as under absorption costing
D) its operating income for the period will be higher than under absorption costing
Answer:
The answer D) is its operating income for the period will be <em>Higher</em> than under absorption costing
Explanation:
<em>Absorption costing</em> speaks to all costs, including fixed costs, related to production,
while <em>Variable costing</em> speaks only to the variable costs directly incurred in production.
It is clear from the above that in computation of the operating income will be lower in absorption costing since it considers only the variable costs incurred during products.
Cheers!
