Question

Q#1: In a reporting period (e.g., a fiscal year) in which production = sales, how does net income compare on a full costing income statement versus a variable costing income statement?

Q#2: In a reporting period (e.g., a fiscal year) in which production > sales, how does net income compare on a full costing income statement versus a variable costing income statement?

Q#3: In a reporting period (e.g., a fiscal year) in which production < sales, how does net income compare on a full costing income statement versus a variable costing income statement?

Answer 1

• Under Variable costing, TOTAL FIXED MANUFACTURING overheads are considered as period cost and are included as expense for that year.
• Under Absorption costing (full costing), TOTAL FIXED MANUFACTURING overheads are APPLIED or ABSORBED on the units sold and some part of the fixed manufacturing overhead gets DEFERRED in ending inventory.
• Answers, based on above concepts:
  [1] When Production = Sales, Net Income on full costing statement would be EQUAL to the net income on variable costing income statement.

[2] When Production > Sales, Net Income on full costing statement would be GREATER than net income on variable costing income statement, because total manufacturing overhead (under variable costing) will be MORE than manufacturing overhead absorbed (under full costing).

[3] When Production < Sales, Net Income on full costing income statement would be LESS than net income on variable costing income statement.