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2.When does absorption costing net operating income and variable costing net operating income require reconciliation? Explain...

2.When does absorption costing net operating income and variable costing net operating income require reconciliation? Explain different situations with appropriate reasons behind such changes.

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Expert Solution

Absorption costing net operating income and variable costing net operating income requires reconciliation when the units produced and units sold are different.
When units produced and units sold is equal so there is no difference in the beginning and ending inventories, the operating income under both methods are the same.
When units produced is greater than units sold , the ending inventory is greater than the beginning inventory , the operating income under absorption costing is greater than the variable costing.
When units produced is lesser than units sold , the ending inventory is lesser  than the beginning inventory , the operating income under variable costing is greater than the absorbtion costing.
The difference in operating income is because of fixed factory overhead ,it is equal to the fixed factory overhead per unit multiplied by the difference in inventory.
Reconciliation of Absorption and Variable Costing Operating Income
Operating income - Absorption costing
Add: Fixed FOH in beginning inventory
Less: Fixed FOH in ending inventory
Operating income - Variable costing

ekkarill92 answered 3 years ago
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