A. The Contribution Margin Income Statement has a higher Net Operating Income than the Absorption Costing...

A. The Contribution Margin Income Statement has a higher Net Operating Income than the Absorption Costing Income Statement: true or false

B. The horizontal line on the CVP Graph represents what one?

fixed costs

total revenue

total expenses

Variable Cost

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Expert Solution

Ans.A. False. The absorption costing income statement has higher net operating income than contribution margin income statement because in absorption costing, all costs including fixed overhead costs during a period are allocated to all units produced in that period,i.e., to units sold and also to unsold units carried as ending inventory. So, some portion of fixed overhead costs gets allocated and added to ending inventory thereby reducing fixed expenses for the current period and increase net operating income for the current period. This is contrary to contribution margin income statement where fixed costs incurred during a period are included in that period's income statement as a line item and not allocated to ending inventory. This increases expenses and reduces net income in the current period.

Ans. B. The horizontal line on the cost-volume-profit graph represents the fixed costs because fixed costs remain constant at all levels of output, hence a horizontal line across different volumes.

ekkarill92 answered 1 year ago

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