By producing more cars than were sold, Ford (F) and General Motors (GM) increased their operating income reported under absorption costing. This is because a portion of their fixed manufacturing costs were included in ending inventory rather than cost of goods sold.
Under variable costing, producing more cars would not affect operating income, because all fixed manufacturing costs are included in cost of goods sold regardless of how many cars are produced.
A reason often given for why GAAP requires absorption costing is that it focuses on operating income “over the long term.” In other words, while operating income may vary from year to year, all manufacturing costs are eventually reported on the income statement as cost of goods sold or as a write-down of inventory using the lower-of-cost-or-market rule. Thus, over the life of a company, the total amount of operating income will be the same regardless of whether absorption or variable costing is used.