How does producing more units than sold affect net income under variable costing, assuming that units produced impacts income?
Understand the Problem
The question explores the impact of production volume exceeding sales volume on net income when using variable costing. Variable costing treats only variable manufacturing costs as product costs, while fixed manufacturing costs are treated as period costs. When production exceeds sales, the impact on net income needs to be determined based on how these costs are recognized.
Answer
Net income is not affected under variable costing.
Under variable costing, if a company produces more units than it sells, net income is not affected. This is because only variable manufacturing costs are included in the cost of goods sold, and fixed costs are treated as period expenses.
Answer for screen readers
Under variable costing, if a company produces more units than it sells, net income is not affected. This is because only variable manufacturing costs are included in the cost of goods sold, and fixed costs are treated as period expenses.
More Information
Under variable costing, the cost of goods sold only includes variable production costs. When more units are produced than sold, the additional variable costs are added to ending inventory, but they don't immediately affect net operating income. Fixed manufacturing overhead is treated as a period cost and is expensed in full regardless of production levels.
Tips
A common mistake is to confuse variable costing with absorption costing. Under absorption costing, producing more units than sold can increase net income because fixed manufacturing overhead is allocated to each unit produced. This means some fixed costs are deferred in inventory when production exceeds sales, leading to a higher net income compared to variable costing.
Sources
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