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¶ … absorption costing method, and why?
In this case, the absorption method would be the best choice due to the way the method incorporates only the overhead. The overhead is allocated to the 80,000 units sold. The variable method normally counts fixed overhead as a period expense. This means that the fixed overhead during this period is calculated on the basis of the 95,000 units made. This calcuation method would be used if the absorption method is chosen. The absorption method is only utilized to calculate fixed overhead on the basis of the 80,000 units sold. The method also provides management a more precise picture of the profitability of the fishing lures. Therefore, making the absorption costing method optimal.
• What are the benefits of the two methods?
Under absorption costing system, the product cost consists of all variable including fixed manufacturing costs. When variable costing system is utilized, the fixed cost, including manufacturing and non-manufacturing, is seen as a period cost and therefore not included in the product cost. The system allows for accurate data communication to management concerning product costs making it the main benefit of said method. It is also beneficial because it provides an output (net income) closer to the cash flow of the business, making it useful for businesses short on cash flow. In short, the variable costing method gives management a more accurate picture of the effect that fixed costs have on the total profitability of the company (Horngren, 1981, p. 26) .
• Which method would lead to the best decision when a competitor is submitting a lower bid for your product?
The method would be Absorption costing due to its use in firms that do not sell all of their manufactured products during the accounting period, like it is with Polk. Under absorption costing, the cost of a good is not shown until the good has been sold (Izar & Hontoir, 2000, p. 13) . It might be seen as a disadvantage if a portion of the goods made are ultimately not sold due to management having to know the cost of the goods produced.
References
Horngren, C. (1981). Introduction to Management Accounting. Englewood Cliffs, N.J: Prentice Hall.
Izar, R., & Hontoir, J. (2000). Accounting, Costing, and Management. Oxford: Oxford University.
Riahi-Belkaoui, A. (1991). Handbook of Cost Accounting Theory and Techniques. New York: Quorum Books.
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