Question

Why would the difference between income computed under full costing and income computed under variable costing be relatively small if a company used a jit inventory management system?

Answer 1

First of all, we have to understand what is Full costing, Variable Costing, and JIT Inventory Management System.

Full Costing

Full costing also know as absorption costing. It allocate all cost to the specific product like fixed cost, variable cost etc.

Absorption costing consider all kind of cost whereas variable costing will only consider cost in variable in nature.

Variable Costing

Variable cost is a method were we only account for those cost that are varied over production output. It will not be a good tacker of profitability but it will help in decision making.

Inventory Management System

JIT stands for Just in Time Inventory. Where basic idea is to buy inventory whenever required, this system doesn't allow holding inventory.

Now coming to the question of why the difference is small when we are operating under JIT Inventory management System is as follows:-

1. Working capital - It is designed to be exceedingly low, so the investment in working capital is very less and will reduce inventory holding cost.

2. Obsolete inventory - Since inventory levels are so low, there is little risk of having much obsolete inventory which in turn will result in less loss.

3. Process time. A thoroughly implemented JIT system should shorten the amount of time required to manufacture products, which may decrease the quoted lead times given to customers placing orders. So the fixed cost will not be incurred on rent etc because of low/ less holding of inventory.

Because of the above factor difference is too small.

Learn more about Variable Costing here: brainly.com/question/6337340

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