Which costing method produces the highest operating$$ income? Explain why.

The

$$

cost method produces the highest operating income. The primary reason for this is that

$$

are distributed across the entire production run as part of

the unit cost. Under the absorption costing method,

$$

of fixed manufacturing costs are

$$

Under the variable costing method, this amount is

$$

Part $2$

Requirement $2.$ Which costing method produces the highest

AprilApril

$3030$

balance in Finished Goods$$ Inventory? Explain why.

A$.$

The finished goods inventory under the absorption costing method is higher than under the variable costing method. The primary reason for this is that the unit cost is higher under absorption costing because fixed manufacturing costs are absorbed by the entire production run and not expensed as a period$$ cost$,$ as they would be under the variable costing method.

B$.$

The finished goods inventory under the absorption costing method is lower than under the variable costing method. The primary reason for this is that with variable$$ costing, some manufacturing fixed costs are still in Finished Goods Inventory on the balance sheet and have not been expensed.

C$.$

The finished goods inventory under the absorption costing method is higher than under the variable costing method. The primary reason for this is that the absorption costing method considers selling and administrative costs to be product$$ costs, and the variable costing method considers them period costs.

D$.$

The finished goods inventory under the absorption costing method is lower than under the variable costing method. The primary reason for this is that the unit cost is higher under variable costing because fixed manufacturing costs are considered a product cost and are not expensed as a period$$ cost$,$ as they would be under the absorption costing method.