What Is the Cause of the Difference Between Absorption Costing

question 30

Multiple Choice

What is the cause of the difference between absorption costing net operating income and variable costing net operating income?

• A) Absorption costing deducts all manufacturing costs from net operating income; variable costing deducts only prime costs.
• B) Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories; variable costing considers all fixed manufacturing costs to be period costs.
• C) Absorption costing includes variable manufacturing costs in product costs; variable costing considers variable manufacturing costs to be period costs.
• D) Absorption costing includes fixed administrative costs in product costs; variable costing considers fixed administrative costs to be period costs.

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Definitions:

LIFO

Last-In, First-Out, an inventory valuation method where the most recently produced items are recorded as sold first.

Ending Inventory

The cumulative worth of all unsold merchandise at the close of a financial period.

Retail Method

An accounting method used to estimate inventory value by converting the cost of goods available for sale into retail prices and then calculating ending inventory at retail prices.

Ending Inventory

The total value of goods available for sale at the end of an accounting period, calculated by adding purchases to beginning inventory and subtracting the cost of goods sold.