Question

When the number of units in work in process and finished goods inventories decrease, absorption costing net operating income will typically be greater than variable costing net operating income.
a. True
b. False

Answer 1

Answer:

b. False

Explanation:

The difference between absorption costing net operating income and variable costing net operating income lies in the fixed costs deferred in closing inventory.

If Production is greater than Sales - Increase in Finished Goods Inventory, Absorption costing net operating income  will typically be greater than Variable costing net operating income.

However, If Production is less than Sales - Decrease in Finished Goods Inventory, Absorption costing net operating income  will typically be less than Variable costing net operating income.