There are different ways companies use to prepare accounting statements. Absorption costing is one of the statements used to by companies to prepare accounting statements to satisfy external parties. Variable costing is used by companies to manage better and both methods have advantages and disadvantages. In this costing method paper, a discussion on whether to use absorption costing or variable costing will be discussed. Also benefits of the two methods and the method that will lead to the best decision when a competitor submits a lower bid for the company’s product will be discussed.
Would it be better to Use Variable or Absorption Costing Method? The process of using absorption costing method uses portion of a company’s fixed overhead costs to the manufacturing product cost. When using the process a per unit process is used and divide the number of fixed costs with the number of units manufactured and sold over the period. The variable costing process uses fixed overhead instead of using the per-unit process. Variable costing will include all the supplies, and raw materials and all fixed overhead for the period.
Using variable costing method would be better because the company pays for inventory that is in storage and when the inventory is sold the come will have extra income because all expenses will have been paid during the account period when the inventory was in stock (Kimmel, etal. , 2009). Benefits of the Two Methods Variable costing method provides companies with a clearer picture of incremental costs within a specific product. It also gives company producers and financial personnel with an accurate representation of what has gone into the cost of producing a product.
Absorption costing method provides a clear picture of a product cost because it includes manufacturing overhead costs. Also absorption costing method can be used as an accounting tool to increase net income by moving fixed manufacturing overhead from the income statement to the balance sheet by increased production volume disproportionately to sales volume (Wilkson, 2011). Method to Use that leads to best Decision when a Competitor bids lower for Product Using the variable costing method will be the best decision because an absorption costing method usually shows an inflated price (Johnston, 2009).