The two different costing methods; Variable and absorption costing can give specific information relevant to various users such as internal or external users. Most internal users will utilize the variable costing method; this method provides a better comparison with incremental costs. Would it be better to use the variable or absorption costing method, and why?
For this case when production is higher than sales, the use of absorption costing would show higher net income. Using the absorption method would be the right choice as it takes into account only the overhead for the 81,100 lures. Using the variable costing method it takes into account the overhead expenses for the period of production which means that we would calculate for the 95,300 lures that were produced. By taking into account the overhead costs incurred for the lures that were sold managers are able to better understand how profitable the lures which were sold are for the company. The Benefits of the two methods
Under absorption costing method it can provides benefits for users in being able to provide a more complete picture of the product cost as it includes the fixed manufacturing overhead costs as well. In its simplest benefits the absorption method takes into account all the potential costs incurred in relation to the product.
For the variable costing method provides a much transparent view of the incremental costs associated with the product. Using the variable costing method takes into account the actual costs that occur with the manufacturing of a product and therefore producers and others using the financial reports are able to better understand the full cost of production of the product. Which method would lead to the best decision when a competitor is submitting a lower bid for your product? When a manufacturer does not sell all of its products manufactured for the period; the absorption costing method is best for decision making. The cost of goods sold is not presented...
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