Variable cost and net operating income

First, both income statement formats include product costs and period costs, although they define these cost classifications differently.

absorption costing and variable costing net operating income will be equal when

When the units produced exceed the units sold, absorption costing net operating income will exceed variable costing net operating income. This occurs because one aircraft was sold in each month and, as previously mentioned, the selling price per aircraft, variable cost per aircraft, and total monthly fixed expenses remain constant.

Under absorption costing, fixed manufacturing overhead costs appear to be variable with respect to the number of units sold, but they are not. While operating income is the income you generate through your operations, net income is final bottom line income for the business. This occurs because some of the fixed manufacturing overhead of previous periods is released from inventories under absorption costing.

Variable costing income statements require one adjustment to support the TOC approach. Which net operating income figures seem counterintuitive? Supporting Decision Making The variable costing method correctly identifies the additional variable costs that will be incurred to make one more unit.

absorption and variable costing problems and solutions

Absorption Costing As discussed in Chapter 3, absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed. Conclusion This is different from that of net income, as net income is bottom-line profit calculated after taking into consideration all expenses and revenues.

Look again at the absorption costing income statements in Exhibit ; a manager might wonder why net operating income went up from January to February even though sales were exactly the same.

Compare the net operating income figures that you computed in requirements 2 and 3 to the break-even point that you computed in requirement 1.

variable and absorption costing formula
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Variable costing income statement