Question

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

Answer 1

In reconciling absorption costing and variable costing net operating income, if Fixed Manufacturing overhead is overallocated, you add the amount to variable costing NOI to arrive at absorption costing NOI.

Step-by-step explanation:

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

This is because in absorption costing, all manufacturing costs, including fixed manufacturing overhead, are considered part of the cost of production and therefore included in inventory costs until the product is sold. With variable costing, only variable costs are included in product costs, while fixed manufacturing overhead is treated as a period expense.