Question

If production is greater than sales then the operating income under absorption costing is

Answer 1

When production is greater than sales, that means the inventory taken at the end is greater than the inventory taken at the beginning, the operating income under absorption costing is greater.

When production is less than sales, that means the inventory taken at the end is greater than the inventory taken at the beginning, the operating income under variable costing is greater.

The dissimilar treatment of fixed factory overhead is the cause for the difference in operating income. The difference is equal to the fixed factory overhead per unit multiplied by the difference in inventory.

Answer 2

If production is greater than sales, then the operating income under absorption costing is more than the operating income under variable costing.

In other words, the above situation occurs when the ending inventory is more than the beginning inventory. This means that as production becomes more than sales, the quantity of closing stock increases.