Mr. Smith Johnson joined as the CEO of his Company after the retirement of his father. Unfortunately, he had no/little background in business and commerce.

The CFO of the the organization submitted Income Statements to him related to three consecutive years, 2016, 2017 and 2018 as Smith wanted to know about the Net Income, he hardly understands how to calculate it.

For 2016 and 2017, he surprisingly noticed that the CFO has provided two different amounts of Net Income figures with same data and information, while Smith wanted to know what they mean by AC method and VC method.

Smith also couldn’t understand when CFO said that the company had same amount of NOI in 2018 under AC and VC methods!

As the CFO of the company, write down a memo to Smith using imaginary figures keeping in mind the following:

1. Explaining/defining AC and VC methods.

2. Computation of unit product cost under AC and VC methods.

3. Treatment of fixed manufacturing OH cost under both methods.

3. Relationship between production and sales.

4. Why and when AC NOI>VC NOI, AC NOI
5. Impact of cost of EI of FG on NOI under both methods.