12 DIFFERENCES IN REPORTED NET OPERATING ING THE LEVEL OF PRODUCTION...

7-12 Differences in reported net operating

ing the level of production without any increase

in sales. If production exceeds sales, units of

income between absorption and variable costing

product are added to inventory. These units

arise because of changing levels of inventory.

carry a portion of the current period’s fixed

Under JIT, goods are produced strictly to cus-

manufacturing overhead costs into the inventory

tomers’ orders. With production geared to sales,

account, thereby reducing the current period’s

inventories are largely (or entirely) eliminated. If

reported expenses and causing net operating

inventories are completely eliminated, they can-

income to increase.

not change from one period to another and ab-

sorption costing and variable costing will report

the same net operating income.