Answer (B) is correct . Under variable costing, inventories are charged only with the variable costs of production. Fixed manufacturing costs are expensed as period costs. Absorption costing charges to inventory all costs of production. If finished goods inventory increases, absorption costing results in higher income because it capitalizes some fixed costs that would have been expensed under variable costing. When inventory declines, variable costing results in higher income because some fixed costs capitalized under the absorption method in prior periods are expensed in the current period.
Answer (A) is incorrect because Fixed overhead is treated differently under the two methods.
Answer (C) is incorrect because Variable costs are the same under either method.
Answer (D) is incorrect because Gross margins will be different. Fixed factory overhead is expensed under variable costing and capitalized under the absorption method.
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