When sales are constant, but the number of units produced fluctuates, net operating income determined by the absorption costing method will:
A)tend to fluctuate in the same direction as fluctuations in the number of units produced.
B)tend to remain constant.
C)tend to fluctuate in the opposite direction as fluctuations in the number of units produced.
D)fluctuate without any relation to the number of units produced.

Question

Quizplus · Accepted Answer

When sales are constant, but the number of units produced fluctuates, net operating income determined by the absorption costing method will tend to fluctuate in the same direction as fluctuations in the number of units produced. This is because absorption costing assigns fixed manufacturing overhead to products based on the number of units produced. As the number of units produced increases, more fixed manufacturing overhead is allocated to each unit, resulting in higher per-unit cost and lower net operating income. Conversely, as the number of units produced decreases, less fixed manufacturing overhead is allocated to each unit, resulting in lower per-unit cost and higher net operating income. Therefore, the fluctuations in net operating income will be directly related to the fluctuations in the number of units produced.

When Sales Are Constant, but the Number of Units Produced