Question

Under what condition will a Company:

-           That uses the Absorption Costing method to assign costs to their

inventory report net operating income using a Traditional Income Statement that

is:

more than

- The comparable net operating income amount using the Variable

Costing method to assign inventory costs to their inventory and reported net

operating income using a Contribution Margin Income Statement

Select one:

a. None of the other answers are correct

b. Inventory balances are increasing during the year--unit production exceeds unit sales for the period

c. Inventory balances are constant during the year--unit production equals unit sales for the period

d. Inventory balances are decreasing during the year--unit production is less than unit sales for the period

e. Variable manufacturing costs overhead exceeds fixed manufacturing overhead costs

Answer 1

Please give positive ratings so I can keep answering. If you have any queries please comment. Thanks!

Please Note- Variable costing (also known as direct costing) treats all fixed manufacturing costs as period costs to be charged to expense in the period received.

Under variable costing, companies treat only variable manufacturing costs as product costs.

Net income under absorption costing is gross profit less fixed and variable selling and administration expenses. But under this method all types of costs and overheads related to production whether fixed or variable becomes part of the product costs.

Answer is Option b.

So, if Inventory balances are increasing during the year--unit production exceeds unit sales for the period

a Company that uses the Absorption Costing method to assign costs to their inventory report net operating income using a Traditional Income Statement that is:

more than

The comparable net operating income amount using the Variable Costing method to assign inventory costs to their inventory and reported net operating income using a Contribution Margin Income Statement.