October 6, 2014
Costing Methods Paper
Would it be better to use the variable or absorption costing method, and why?
In this case it would be more favorable to use the absorption method because with this method, the company only incorporates the overhead that is allocated to the number of units sold which is 81,400. The variable method calculates fixed overhead as a period expense which is calculated based off the 93,300 units that were produced but only if the absorption method is used. With the absorption method, it only calculates fixed overhead based off the 81,400 units that were sold. This helps provide leadership with a clear picture of the company’s profitability of its product.
What are the benefits of the two methods?
With the absorption costing system, the product cost is made up from all variable and fixed manufacturing cost however with the variable costing system the fixed cost is treated as a period cost and not included in the total product cost. The main benefit of absorption method is being able to give factual information to management of production cost. For the variable method the main benefit provides net income or an output that is closer to the cash flow with in the business which comes in handy if a company is short of cash, thus providing management with a clear picture of the fixed cost effect on the total profitability of the business.
Which method would lead to the best decision when a competitor is submitting…