Chapter 7, Problem 12F15

To determine

Net operating income under Variable costing system and Absorption costing method:

Variable Costing is a costing method which comprises of only variable manufacturing costs. Variable manufacturing costs include direct materials, direct labor and variable manufacturing overhead.

Absorption Costing is different from variable costing. It comprises of direct materials, direct labors and both variable and fixed manufacturing overhead. Thus in absorption costing all of the manufacturing costs is absorbed by the units produced.

.

Operating income we get by reducing the fixed expenses from the contribution margin.

If the company produces 5000 fewer units than it sells in the second year of operations, will absorption costing net operating income be higher or lower than variable costing net operating income in year 2.