Operating income will differ between two costing methods if the __________?
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Answer: B. inventory changes
Explanation
Operating income will differ between variable and absorption costing whenever inventory levels change during the period. When production equals sales and inventory is stable, both methods report identical operating income figures. Absorption costing capitalizes fixed manufacturing overhead into inventory, whereas variable costing expenses it immediately. If inventory increases, absorption costing defers fixed costs on the balance sheet, boosting income.
This income divergence is crucial for managers to understand so they do not misinterpret inventory build-ups as profit growth. Auditors and financial analysts routinely reconcile income differences between the two methods. Fixed cost changes alone or stable inventory levels do not cause an income divergence between methods. Income differences are driven specifically by fluctuations in inventory quantities from period to period.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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