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.
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