The number of units produced does not affect net operating income when using which of the following inventory costing methods?

• A. LIFO under perpetual inventory
• B. Variable costing
• C. FIFO under periodic inventory
• D. Absorption costing

Answer: (B)

Verified step by step guidance

1. Understand the concept of inventory costing methods: Inventory costing methods determine how costs are assigned to inventory and cost of goods sold. Common methods include Variable Costing, Absorption Costing, FIFO (First-In, First-Out), and LIFO (Last-In, First-Out).
2. Learn about Variable Costing: Under Variable Costing, only variable production costs (direct materials, direct labor, and variable manufacturing overhead) are included in product costs. Fixed manufacturing overhead is treated as a period expense and does not affect the cost of inventory.
3. Analyze the impact of production levels on net operating income under Variable Costing: Since fixed manufacturing overhead is expensed in the period incurred, the number of units produced does not affect net operating income. Net operating income is driven by sales volume rather than production volume.
4. Compare Variable Costing with Absorption Costing: Absorption Costing includes both variable and fixed manufacturing overhead in product costs. This means that changes in production levels can affect net operating income because fixed overhead costs are allocated to inventory and expensed when sold.
5. Conclude why Variable Costing is the correct answer: Under Variable Costing, net operating income is unaffected by the number of units produced because fixed costs are not allocated to inventory. This is different from Absorption Costing, FIFO, and LIFO methods, where production levels can influence net operating income.