Question

The difference between absorption costing net operating income and variable costing net operating income can be explained by the way these two methods account for ________.

Answer 1

Answer:

The correct answer is Fixed overhead costs.

Explanation:

Fixed overhead costs are those costs incurred by a company that do not depend on the scale of production. There are two main types of expenses in relation to the financial balance of a company. The other type is variable expenses.

A company may encounter many different types of fixed expenses, but they all have something in common. Unlike variable expenses, fixed expenses will be maintained even if the company stops producing goods and services for a while or even if its production increases.

An example of a fixed cost would be the license that a company may need each year to operate, but whose amount does not vary if production increases. If production were increased, the value obtained thanks to that license would increase, but the cost would remain the same. Therefore, fixed costs are essential to take advantage of economies of scale.