Absorption vs. Variable Costing

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Absorption vs. Variable Costing
ACC 401
31 August 2013
Validity for using the Absorption or Variable Costing Method In the case, it is more advantageous to use absorption costing than the variable costing because it is a simpler method of providing accurate record for the external reporting for a highly unstable manufacturing volume in the manufacturing company. More importantly, the absorption costing provides more accurate picture of cash flow of an organization since the organization will add unsold product to the sale mount of the next fiscal year. (Walther, 2013).With the absorption costing, the organization will be able to transfer the cost of inventory to the costs of goods sold making the organization to reduce the gross profit. The rational behind using the absorption costing is that firms will be able to measure the products as complete costs. (Noreen, E.W. Brewer, P.C. Garrison, R.H. (2013).
The shortcoming of absorption costing is that it does not always provide the best signal on the strategy to price a product. Moreover, absorption costing assigns both fixed and variable manufacturing costs to products and mix them that makes management to face challenges to distinguish between the two costs.
The report provides the benefits of the absorption and variable costing to reveal how the two costing methods enhance managerial decision.
Benefits of the Absorption and Variable Costing Methods
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