Question

When reconciling absorption costing and variable costing net operating income, if Fixed Manufacturing overhead is _____________, you subtract the amount from variable costing NOI to get the absorption costing NOI.

Answer 1

To reconcile the NOI between absorption costing and variable costing, subtract the Fixed Manufacturing overhead from the variable costing NOI.

Step-by-step explanation:

When reconciling absorption costing and variable costing net operating income (NOI), if Fixed Manufacturing overhead is not released into the cost of goods sold under variable costing, it remains as a period cost. To align the NOI under both costing methods.

You subtract the Fixed Manufacturing overhead deferred in inventory under absorption costing from the variable costing NOI to reconcile with the absorption costing NOI. It's because under variable costing, only variable production costs are assigned to units of product.

Fixed costs, such as rent on a factory or a lease for equipment, are expenditures that do not change with the level of production. Such costs are often sunk costs that are already spent and cannot be recuperated. Knowing how to manage these costs is crucial for business profitability, as total revenue must exceed total costs to earn a profit.