Absorption Costing

Under absorption costing, how is it possible to increase net operating income without increasing sales? By increasing the amount of production will increase net operating income and without increasing sales. Understanding that companies do not want production to exceed the amount of sales at least by not much because that can cause an issue with investors. The bottom line is the investor’s wants to see profit up or higher operating income. We know that increasing sales can accomplish this. Under the absorption costing method companies can still look good by showing a decrease in expenses and by taking in consideration that the product can be added to the inventory account which will reduce the cost of expenses and show increase to the operating income. On the income statement it will show a lower cost of goods sold because they have increased the production and inventory will show a higher profit margin or an increase in operating income. Let’s say for an example purposes on how absorption costing works that Wal-Mart’s fixed production costs totaled nine hundred thousand (900,000) dollars for the year and that they produced two hundred and seventy thousand (270,000) shirts, but they only sold one hundred and eighty thousand (180,000) shirts for the year. Under the absorption costing method we will calculate the fixed cost of each shirt by taking nine hundred thousand (900,000) dollars and divide it by the amount they produced for is two hundred and seventy thousand (270,000) shirts and we will get the cost of three dollars and thirty three (3.33) cents per shirt. Now we take the cost of each shirt and multiply it by what Wal-Mart sold we would get roughly five hundred ninety nine thousand four hundred (599,400) dollars which will be marked down as costs of goods sold while the remaining three hundred thousand and six hundred (300,600.) dollars will be marked as inventory. So by increasing production and mark it as inventory will increase the net operating income....