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A manufacturer produces 15,000 units and sells 15,000 units in the same period. How do the two operating income figures compare?
AAbsorption is higher, since inventory has risen
BVariable is higher, since inventory has fallen
CAbsorption is lower, since fixed costs are spread
DThey are the same, since inventory has not moved
Answer & Solution
Correct answer: D. They are the same, since inventory has not moved
1. The two methods differ only in when fixed factory overhead reaches profit or loss.
2. Fixed overhead is held back in inventory under absorption costing and released as units are sold.
3. When production equals sales, closing inventory matches opening inventory, so nothing is held back or released.
4. The whole $150,000 of fixed overhead hits both statements, giving $100,000 of operating income under each.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 6.2 Units Manufactured Equals Units Sold_
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