True or false: When units produced are less than units sold, net income under absorption costing will be less than net income computed under variable costing.

Generally, net income will be the same under absorption costing and variable costing. However, producing fewer units than units sold will decrease the net income under absorption costing. As whatever the variable cost is under the absorption method, fixed manufacturing overhead remains the same that decreases the gross profit and net income. Under the variable costing, the fixed overhead will be calculated as per the units produced. Therefore, the net income will decrease proportionately.

dubeyshailja64 dubeyshailja64 · Answer 2 · 2022-02-25T07:31:21+01:00

The given statement is true.

What is absorption costing and variable costing?

Absorption costing accounts the total cost of production of goods or services, whereas variable costing is a method that only assigns the variable costs to the inventory.

The profits calculated in both the methods is same when the unit produced and unit sold are same. Since the difference between both the methods is the allocation of fixed cost.

But in case when the units produced are less than units sold, the profit calculated under absorption costing will be less than that of variable costing, the ending inventory will be less than the beginning inventory and hence the profit of variable costing will be greater.

Therefore the statement is true.

Learn more about absorption costing and variable costing here: