87 Full costing net income will be higher than variable cost

8-7 Full costing net income will be higher than variable costing net income when: A. Production equals sales B. Production is greater than sales C. Production is less than sales D. None of the above

Solution

Understanding

Full costing approch or absorption costing considers Fixed manufacturing expense as a part of product cost however in variable costing only direct labour, direct material and variable manufacturing cost are product cost. Therefore Net income will be higher in full costing approach or absorption method when production is more than the sales. This technique increases profits in the period of production by incurring less cost than would be incurred under a variable costing method.

Answer to above question is Option B - when production is more than sales.

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