Write a 150 word minimum answer to the following question.
Q. Under absorption costing, how is it possible to increase net operating income without increasing sales?
Write a 50 word minimum peer responses each to the two answers “can be agree or disagree and why”.
1. Absorption costing statements show how sales, cost of goods sold, and selling and administrative expenses make up the net operating income. You can increase net operating income without increasing sales by increasing the level of production without selling any goods. If production exceeds sales, the goods that are produced will be added to inventory until it is sold. In absorption costing, fixed manufacturing overhead is added to the product cost however, it is not recorded under cost of goods sold until the product is actually sold. It is deferred to the next month. This is the reason why net operating income can fluctuate from month to month without sales changing. Referencing the example in our book, the sales in January and February remain the same because because one unit of goods that were produced in February was not sold until March. This deferred the cost until March because it was not sold in the same month it was produced.
2. Under absorption costing, the costing will usually show higher net operation income than variable costing, when production exceeds sales, inventories increase and under production and under absorption costing part of the fixed manufacturing overhead cost of the current period is deferred in inventory to future periods. (Less expenses are recorded). In contrast, all of the fixed manufacturing overhead cost of the current period is immediately expensed under variable costing. Net operating income can be increased by increasing the level of production without any increase in sales. If production exceeds sales, units of product are added to inventory. These units carry a portion of the current period;s fixed manufacturing overhead costs into inventory account, reducing the current period's reported expenses and causing operating income to increase. If fixed manufacturing overhead cost is released from inventory levels must have decreased and therefor production must have been less then sales. If production and sales are equal, net operating income should be the same under absorption and variable costing.
Each answer MUST be answerd separately.
- Posted: 4 years ago
- Due: 20/09/2015
- Budget: $5