B is corrent. The requirement is to identify the true statement or statements about the relationship between absorption costing and variable costing. Under variable costing only variable production costs are capitalized as a cost of the product. Fixed costs are expensed in the period in which they are incurred. Under absorption costing variable and fixed costs are capitalized as a cost of the product. When production exceeds sales, variable and fixed costs are capitalized as a cost of the product. When production exceeds sales, variable costing income will be less than absorption costing because under absorption costing some fixed costs will be capitalized as a part of the cost of the added inventory. Under variable costing all of the fixed costs will be expensed. In addition, when sales exceeds production, variable costing income will exceed absorption costing income because under absorption costing, fixed costs capitalized as a part of the cost of beginning inventory will be expensed in the current year. Therefore, neither of the statements is true and this answer is the correct answer.
A is incorrect. Statement I is not true.
C is incorrect. Statements I and II are not true.
D is incorrect. Statement II is not true.
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