Question

For each of the statements below, use the dropdown box to select the response that completes the sentence correctly. Knowledge Check 01 When the units produced are equal to the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is greater than is less than is equal to Knowledge Check 02 When the units produced exceed the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is greater than is equal to is less than Knowledge Check 03 When the units produced are less than the units sold, the net operating income computed using the variable costing method is ______ the net operating income using the absorption costing method. is equal to is greater than is less than

Answer 1

Answer:

01 When the units produced are equal to the units sold, the net operating income computed using the variable costing method is EQUAL TO the net operating income using the absorption costing method.

02 When the units produced exceed the units sold, the net operating income computed using the variable costing method is LOWER THAN the net operating income using the absorption costing method.

03 When the units produced are less than the units sold, the net operating income computed using the variable costing method is HIGHER THAN the net operating income using the absorption costing method.

Explanation:

The basic difference between variable costing and absorption costing methods is that when you use variable costing, the ending inventory only carries variable costs. While under absorption costing, the ending inventory carries both variable and fixed costs. That means that ending inventory under variable costing is worth less than ending inventory under absorption costing (remember that one period's ending inventory is the beginning inventory of the next period).