Question

If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?

Answer 1

Absorption costing technique is basically used to reduce expenses, which increases operating income.

What is Absorption costing?

• We know that total cost is summation of fixed cost and variable cost. But absorption cost we consider the product cost only neither fixed cost nor variable cost.

• Incurred cost is recovered by selling price of goods and services. Absorption costing technique is basically used to reduce expenses, which increases operating income.

• There are two steps to increase net operating income, they are 1. Increase production. 2. Decrease in expenditure.

• Increase in production as more productivity as more income is generated. Decrease in expenditure- It causes to increase saving. When somehow production is fixed then we can reduce expenditure to maintain the saving.

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