Differences between sales and production volume re¬ sult in differences in income between absorption and variable costing because

• absorption costing requires fixed costs are writ¬ ten off as a function of the number of units sold;

>- Thus, if production volume is higher than sales volume, some fixed costs will be de¬ ferred in inventory at year-end, making net income higher than under variable costing.

>- Conversely, if sales volume is higher than production volume, the deferred fixed costs from previous periods will be written off as part of cost of goods sold, making net in¬ come lower than under variable costing.

• variable costing requires that all fixed costs are written off in the period incurred, regardless of when the related inventory is sold;

>- Thus, if production volume is higher than sales volume, all fixed manufacturing costs will be expensed in the current period and not be deferred until sold, making net in¬ come lower than under absorption costing.

»- Conversely, if sales volume is higher than production volume, only current period fixed manufacturing costs will be expensed in the current period, making net income higher than under absorption costing.

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