Exercise 19-17 Case Study
Exercise 19-17
Brandi Glasco
University of Phoenix
ACC/561
September 24, 2014
Professor Minh Truong
Exercise 19-17
• In this case, would it be better to use the variable or absorption costing method, and why? In this case, it would be in the companys best interest to utilize the absorption method because only the overhead that is billed to the 80,300 units that are sold is integrated. In the variable method, fixed overhead is counted as an expense by periods, which means the fixed overhead allotted during this period is calculated by using the 95,100 units that are produced. The fixed overhead in the absorption method are caluculated on the basis of the 80,300 units that are actually sold (Wiley, 2000-2014). This method aids management in providing a more definite outlook of their profitability regarding the fishing lures, therefore, the absorption method is most favorable.
• What are the benefits of the two methods? …show more content…
When using the absorption costing system, the cost of the product includes all variable costs and all fixed manufacturing costs.
When using the variable costing system, the manufacturing and non-manufacturing fixed costs are calculated as a period cost, which is not included in the cost of the product (Wiley, 2000-2014). The main benefit of the absorption method is that management is able to provide accurate information about the costs of the product and the main benefit for the variable method is that an output (net income) is provided that is more respresentative of the actual cash flow of the business. The variable method may work better for businesses that tend to have a shortage of cash flow (Wiley, 2000-2014). The variable costing method offers management a comprehensible picture of the results that the fixed costs have on the entire profitablilty of the
company.
• Which method would lead to the best decision when a competitor is submitting a lower bid for your product?
The absorption costing is mainly useful for the organizations that do not get rid of all of the products that have been manufactured during a specific accounting period, as with the Polk company (Wiley, 2000-2014). When using the absorption costing method, the cost of the products that are produced are not viewed until the product is actually sold. This can be a disadvantage to the company if a fraction of the products are not sold because management will still need to be aware of the costs incurred to produce these goods (Wiley, 2000-2014).
References
Wiley, J. (2000-2014). Accounting: Tools for Business Decision Making [University of Phoenix Custom Edition eBook]. Hoboken, NJ: John Wiley & Sons, Inc.. Retrieved from University of Phoenix, ACC561 website.
Brandi Glasco
University of Phoenix
ACC/561
September 24, 2014
Professor Minh Truong
Exercise 19-17
• In this case, would it be better to use the variable or absorption costing method, and why? In this case, it would be in the companys best interest to utilize the absorption method because only the overhead that is billed to the 80,300 units that are sold is integrated. In the variable method, fixed overhead is counted as an expense by periods, which means the fixed overhead allotted during this period is calculated by using the 95,100 units that are produced. The fixed overhead in the absorption method are caluculated on the basis of the 80,300 units that are actually sold (Wiley, 2000-2014). This method aids management in providing a more definite outlook of their profitability regarding the fishing lures, therefore, the absorption method is most favorable.
• What are the benefits of the two methods? …show more content…
When using the absorption costing system, the cost of the product includes all variable costs and all fixed manufacturing costs.
When using the variable costing system, the manufacturing and non-manufacturing fixed costs are calculated as a period cost, which is not included in the cost of the product (Wiley, 2000-2014). The main benefit of the absorption method is that management is able to provide accurate information about the costs of the product and the main benefit for the variable method is that an output (net income) is provided that is more respresentative of the actual cash flow of the business. The variable method may work better for businesses that tend to have a shortage of cash flow (Wiley, 2000-2014). The variable costing method offers management a comprehensible picture of the results that the fixed costs have on the entire profitablilty of the
company.
• Which method would lead to the best decision when a competitor is submitting a lower bid for your product?
The absorption costing is mainly useful for the organizations that do not get rid of all of the products that have been manufactured during a specific accounting period, as with the Polk company (Wiley, 2000-2014). When using the absorption costing method, the cost of the products that are produced are not viewed until the product is actually sold. This can be a disadvantage to the company if a fraction of the products are not sold because management will still need to be aware of the costs incurred to produce these goods (Wiley, 2000-2014).
References
Wiley, J. (2000-2014). Accounting: Tools for Business Decision Making [University of Phoenix Custom Edition eBook]. Hoboken, NJ: John Wiley & Sons, Inc.. Retrieved from University of Phoenix, ACC561 website.