Question

When units produced exceed units sold for a reporting period, would income under variable costing be greater than, equal to, or less than income under absorption costing? Explain.

Short answer

The income under the variable costing is less than the income under absorption costing When the units produced exceeds the unit sold during the period. It is so because the fixed cost is already present in the ending inventory under absorption costing.

Step-by-step solution

Meaning of Costing

Costing is a managerial accounting that focuses on calculating the total cost of the product manufactured in the company. The company can use any method, either by variable, marginal, or absorption costing, to calculate the total cost of the product.

Income under variable costing is less than the income under absorption costing

Under absorption costing, the total cost of the product includes the fixed cost. It means every unit price consists of a Fixed cost. While in variable costing, only the variable cost includes, which means that the total fixed cost deducts separately, which may increase the total cost amount of the product. Hence, the income under variable costing is less than the income under absorption costing.