When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will:

I remember this from when I majored in Accounting long ago. Word of advice, make sure your post is complete and that you choose your own answer so that a tutor can verify whether it is correct or incorrect.

The net operating income determined by the absorption costing method will fluctuate in the same direction as fluctuations in the level of production.

When sales are constant but the production level fluctuates, the net operating income determined by the absorption costing method will vary. This is because absorption costing takes into account fixed manufacturing overhead costs, which are allocated to each unit produced.

In absorption costing, fixed manufacturing costs are absorbed into the units produced, and any difference between actual production and sales will affect net operating income. When production exceeds sales, more fixed manufacturing costs are allocated to each unit, resulting in higher net operating income. Conversely, when production is lower than sales, fewer fixed manufacturing costs are allocated, leading to lower net operating income.

Therefore, the fluctuation in production levels will have an impact on net operating income determined by absorption costing as it includes fixed manufacturing costs that vary based on production levels.

To determine how net operating income is affected by the absorption costing method when sales are constant but production levels fluctuate, we need to understand the basic concept of absorption costing.

Absorption costing is an accounting method used to allocate fixed manufacturing overhead costs to each unit produced. It includes both variable and fixed manufacturing overhead costs in the cost of a product. The fixed manufacturing overhead costs are absorbed or allocated to the units produced based on a predetermined overhead rate.

In a situation where sales are constant but the production level fluctuates, the absorption costing method will affect net operating income.

Here's a step-by-step explanation of how to determine the impact on net operating income:

1. Calculate the fixed manufacturing overhead rate: Divide the total fixed manufacturing overhead costs by the expected total number of units to be produced. This rate is used to allocate the fixed overhead costs to each unit produced.

2. Calculate the variable manufacturing costs per unit: Add up all the variable manufacturing costs (e.g., direct materials, direct labor, variable overhead) and divide by the total number of units produced. This gives you the variable manufacturing cost per unit.

3. Determine the absorption cost per unit: Add the fixed manufacturing overhead rate (step 1) to the variable manufacturing cost per unit (step 2). This gives you the total absorption cost per unit.

4. Calculate the total absorption cost: Multiply the absorption cost per unit (step 3) by the actual number of units produced. This gives you the total absorption cost.

5. Determine the difference between actual production level and expected production level: Calculate the difference between the actual number of units produced and the expected number of units to be produced. This represents the fluctuation in production level.

6. Adjust the total absorption cost: Multiply the difference in production (step 5) by the fixed manufacturing overhead rate (step 1). This adjusts the total absorption cost to account for the fluctuation in production level.

7. Calculate net operating income: Subtract the total absorption cost (adjusted for the fluctuation in production) from the total sales revenue. This gives you the net operating income determined by the absorption costing method.

In summary, when sales are constant but the production level fluctuates, the net operating income determined by the absorption costing method will be affected. The impact depends on the relationship between the fixed manufacturing overhead costs, the variable manufacturing costs, the production level, and the sales revenue. By following the steps mentioned above, you can calculate the specific impact on net operating income in a given scenario.