A Comparison For Variable Cost And Absorption Costing

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I have attached an analysis for your review. This analysis reflects a comparison for Variable Cost and Absorption costing using
Sales: 60,000 units
Production: 80,000 units
Ending Inventory: 20,000 units
Based on these analyses I have made several recommendations along with pros and cons to aid in the decision-making process.

I recommend that we use absorption costing over variable costing. Absorption costing is a method where “…fixed manufacturing costs are inventoriable costs” (Datar, et al, 2009). That is, inventory “absorbs” all manufacturing costs. In the absorption metho there does not need to be a distinction between fixe and variable costs.
Per the analyses performed on the attached spreadsheets one can see that the …show more content…

We should experience some of the following positives after implementing JIT:

Supply Chain Management: The JIT inventory model may assist in being more efficient in the way we handle supply chains and use our parts to assemble products. We can provide lower costs throughout the manufacturing process; which can be passed on to our customers. With our lower costs, we could produce a more affordable product for our customers and thereby help to stay ahead of our competitors.

Reduction of Waste: By maintaining our current method we are housing products that go unused and/or become obsolete. This causes us to sell product at a reduced price often less than cost or we must dump the product with no money gained at all. The JIT inventory model should help to address this situation and by housing fewer products in the warehouses we could address our customer needs quicker and be open to customized orders.

Reduction in Warehouse Costs: It can be costly to keep excess inventory on hand. By moving to JIT we may be able to reduce the number of warehouses we currently have as well as eliminate excess storage.

Improved Customer Relations: Adopting the JIT model will allow for better servicing of our customers. Having greater control of the manufacturing process will make it easier to respond to our customers’ needs and any changes they may have or require.

While I have high-lited the positives above we must also consider possible negative aspects.

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