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Home Variable Costing System Impact of Just In Time (JIT) Inventory Methods on Variable and Absorption Costing System
 
 

Impact of Just In Time (JIT) Inventory Methods on Variable and Absorption Costing System:

Variable costing and absorption costing produce different net operating income figures whenever the number of units produced is different from the number of units sold. In other words, whenever there is a change in the number of units in inventory. Absorption costing net operating income figure can be erratic, sometimes moving in a direction that is opposite from the movement in sales.

When companies use just in time (JIT) methods, these problems are reduced. The erratic movement of net operating income under absorption costing and the difference in net operating income between absorption and variable costing occur because of changes in the number of units in inventory. Under just in time (JIT) goods are produced to customers' orders and the goal is to eliminate finished goods inventory entirely and reduce work in process inventory to almost nothing. If there is very little inventory, the changes in inventories will be very small and both variable costing and absorption costing will show basically the same net operating income figure. In that case, absorption costing net operating income will move in the same direction as movement in sales.

Of course the cost of a unit of product will still be different between variable and absorption costing. But when just in time (JIT) is used, the differences in net operating income will largely disappear.

Relevant Articles:

Variable Costing Versus Absorption Costing System
Income Comparison of Variable and Absorption Costing
Advantages, Disadvantages and Limitations of Variable Costing System
Advantages and Disadvantages of Absorption Costing
Variable Costing and Theory of Constraints
Impact of Just In Time (JIT) Inventory Methods on Variable and Absorption Costing System

 

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Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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