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Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?

a. When production equals sales, absorption costing income is less than variable costing income.

b. When production is less than sales, absorption costing income is greater than variable costing income.

c. When production equals sales, absorption costing income is greater than variable costing income.

d. When production is greater than sales, absorption costing income is greater than variable costing income.

【答案解析】D

Explanation

Choice "d" is correct. When production is greater than sales, absorption costing income is greater than variable costing income. Production in excess of sales result in increases in inventory that include capitalization of fixed product costs that are immediately expensed under variable costing. Since costs that are used in the determination of net income for variable costing are accounted for in inventory for absorption costing, absorption costing will produce higher net income than variable costing when production is greater than sales.

Choice "c" is incorrect. When production equals sales, there is no change in inventory and absorption costing and variable costing produce identical results.

Choice "a" is incorrect. When production equals sales, there is no change in inventory and absorption costing and variable costing produce identical results.

Choice "b" is incorrect. When production is less than sales, inventory declines and absorption costing produces earnings less than variable costing because fixed product costs included in inventory in prior years are charged to earnings when inventory declines. These "extra" costs were already recognized in prior periods under variable costing. As a result, absorption costing produces lower net income than variable costing when production is less than sales and inventory declines.

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