Effects of Variable Costing vs Absorption Costing

The video tutorial explains the impact of production and sales on inventory and income using variable and absorption costing methods. When production equals sales, inventory remains unchanged, and income is the same for both costing methods. If production exceeds sales, inventory increases, and income is lower under variable costing compared to absorption costing. Conversely, if production is less than sales, inventory decreases, and income is higher under variable costing. The tutorial highlights how these costing methods can influence reported income based on production and sales levels.

What happens to inventory when production equals sales?

• Inventory fluctuates

• No change in inventory

• Inventory decreases

• Inventory increases

When production is greater than sales, how does variable costing income compare to absorption costing income?

• Variable costing income is lower

• Both incomes are equal

• Variable costing income is unaffected

• Variable costing income is higher

If production is less than sales, what happens to inventory?

• Inventory increases

• Inventory decreases

• Inventory remains the same

• Inventory is unaffected

In the scenario where production is less than sales, how does variable costing income compare to absorption costing income?

• Variable costing income is higher

• Variable costing income is unaffected

• Variable costing income is lower

• Both incomes are equal

How can variable and absorption costing methods be used in financial reporting?

• To ensure consistent inventory levels

• To manipulate income

• To eliminate income fluctuations

• To standardize income