How do variable costing and absorption costing differ? When is net operating income different under the two methods?
Variable costing and absorption costing treat fixed overhead costs differently. Under variable costing, fixed overhead costs are treated as period costs, whereas under absorption costing, fixed overhead costs are treated as product costs.
Net operating income will differ under the two methods when the number of units produced and sold is different. When sales exceed production, variable costing will report higher net operating income than absorption costing. When production exceeds sales, absorption costing will report higher net operating income than variable costing.
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