When sales exceed production and the company uses the LIFO inventory flow assumption, the net operating income reported under variable costing generally will be:

A) less than net operating income reported under absorption costing.
B) greater than net operating income reported under absorption costing.
C) equal to net operating income reported under absorption costing.
D) higher or lower because no generalization can be made.

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Brandon Collins · Accepted Answer

Final Answer : B, Explanation :  When sales exceed production and a company uses the LIFO inventory flow assumption, the cost of older, usually cheaper inventory is matched against current revenues, leading to higher costs of goods sold under LIFO. Under variable costing, fixed manufacturing overhead is expensed in the period incurred, not included in product costs like under absorption costing. This can result in higher net operating income under variable costing compared to absorption costing in this scenario, as the absorption costing method will include higher fixed manufacturing overhead allocated to the cost of goods sold from inventory.

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