A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in the current year was the same as in the previous year. The variable costing statement reported a profit whereas the absorption costing statement reported a loss. The difference in reported income could be explained by units produced being:
A.
less than units sold.
Incorrect B.
less than the activity level used for allocating overhead to the product.
C.
in excess of the activity level used for allocating overhead to the product.
D.
in excess of units sold.
You answered B. The correct answer is A.
Variable product costs (material, labor, and variable overhead) are charged against revenue in the period the product is sold under both absorption and variable costing.
Fixed overhead is treated differently. It is expensed in its entirety during the period incurred under variable costing but under absorption costing it is applied to product and appears on the income statement only when the product is sold.
In the situation described, absorption costing reported less income than variable costing because some of the previous year's fixed overhead was included in cost of goods sold as a result of producing less units than were sold in the current year.
Fixed overhead is a product cost for absorption costing at time of sale and a period cost under variable costing at time of production.
***Is Absorbtion income lower because the firm produced less inventory than it sold therefore it tapped into their inventory from the previous year. This would also mean that in the previous year They produced more units than they sold therefore absobtion method had a higher net income than variable method.
.