NAME : Abu Zafour
Fathers Name : M. Fazlur Rahman
Mothers Name : Mrs. Kohinur Begum
Date of Birth : 1st January, 1988
Nationality : Bangladeshi by birth
Birth Place : Bauphal, Patuakhali
Marital Status : Single
Religion : Islam (Sunni)
Weight : 60 Kg.
Height : 5’ 4”
Health : Fit
Reconciliation of Net Operating Income
The reconciliation of
the variable costing and absorption net operating income are shown in the
following figure -
|
Particulars |
Amount (TK.) |
Amount (TK.) |
|
Year |
2007 |
2006 |
|
Variable costing net
operating income Add fixed
manufacturing overhead costs deferred in inventory under absorption costing Deduct fixed
manufacturing overhead costs released from inventory under absorption costing Absorption costing net
operating income note-1 |
1,968,998,200 31,452,210 31,413,110 1,969,037,300 |
1,627,059,370 31,413,110 29,356,500 1,629,115,980 |
Note-1
Absorption costing income statement show that the Net operating
Income of SQUARE PHARMACEUTICALS LTD. for the year 2007 is tk.
1,969,036,800 but in reconciliation it shows that the company’s Net Operating
income is 1,969,037,300. This difference is tk. (1,969,037,300 — 1,969,036,800)
=500 and in 2006 absorption costing Net Operating Income is tk. 1,629,116,436 but
in reconciliation we see that this is tk. 1,629,116,436. Difference is tk.
(1,629,116,436—1,629,115,980) = 456. These differences occurred due to the
fractions in different figure.
Summary Result at a Glance
The total result of our
calculation for the comparison of net effect on net operating income under both
methods Absorption Costing and Variable Costing are shown in the following:
|
Particulars |
Year-2007 |
Year-2006 |
||
|
Costing method |
Absorption |
Variable |
Absorption |
Variable |
|
Product cost |
1.40 |
1.23 |
1.4181865 |
1.23 |
|
Period cost |
0.46 |
0.63 |
0.4933804 |
0.6823099 |
|
Net operating income |
1,629,116,436 |
1,627,059,370 |
||
|
Effects |
|
|
||
|
Inventories |
Increased during the year |
Increased during the year |
||
|
Net operating income |
Absorption costing net
operating income > Variable costing net operating income |
Absorption costing net
operating income > Variable costing net operating income |
||
|
Net operating income |
1,969,036,800>1,968,998,200 |
1,629,116,436>1,627,059,370 |
||
Overall Comments
From the calculations of net operating income of variable costing
and absorption costing of Square Pharmaceuticals Limited we see that, in 2006
their net operating income under absorption costing is tk. 1,629,116,436 and
under variable costing net operating income is tk. 1,627,059,370. Here a
question arise that why this difference is occurred. This difference is
occurred due to use of different accounting method. We know that if inventory
increase during the year then the net operating income is increased under absorption
costing than that of viable costing net operating income statement. Because
when inventory increase then fixed manufacturing overhead cost of these ending
inventories is deferred to the next period, as a result total cost during the
year is decreased. Here fixed manufacturing overhead cost is treated as product
cost, but in case of variable costing method fixed manufacturing overhead cost
is treated as period cost. So total manufacturing overhead cost is charged in
the period regardless their sales volume. As a result net operating income
under this method is lower than that of absorption costing method. In
2006 opening inventory is 173,850,000 units and ending inventory is 184,783,000
units. Here we see that inventories are increased (184,783,000 – 173,850,000) =
10,933,000 units during the year, as a result net operating income is increased
under the absorption costing method than the variable costing method.
In the same way in 2007 opening inventory is 184,7