Changes in the quantity of finished goods inventory, caused by differences in the levels of sales and production, directly affect the amount of operating income reported under absorption costing.

Finished Goods Inventory

This is the account that contains the cost of finished goods that are ready to be sold but are still in stock.

Absorption Costing

Absorption Costing is a method of inventory costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.

Operating Income

Profit generated from a company's regular business operations, excluding deductions for interest and taxes.