Week 8 - Absorption and Variable Costing III

Question 1

When will absorption costing give a better net income than variable costing?

Answer 1

When inventory increases, because we are deferring the costs of the inventory (the fixed manufacturing overhead, which will be accounted for in the following period in the ending inventory)

Question 2

When will variable costing give a better net income than absorption costing?

Answer 2

When inventory decreases

Question 3

What happens when there is no change in inventory (production = sales)?

Answer 3

Absorption and variable costing will give the exact same net income