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Cost Methods

In: Business and Management

Submitted By peachgirl78
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Pages 3
Costing Methods Paper
LaKeisha R. Fields
ACC/561- Accounting
July 15, 2013
Facilitator: Shirley Smith

Costing Methods Paper
Introduction-Absorption vs. Variable Costing In managerial accounting there are two cost methods that can be utilized for the purpose of presenting financial data in a manufacturing environment. They consist of absorption and variable costing methods. Although they are somewhat similar they have key differences that impact a company. In absorption costing the profit is attached to the unit of each item produced. The fixed costs associated in the manufacturing are also considered. This leaves much uncertainty to the actual price to the unit produce. In variable costing the accuracy is much more accepted in managerial accounting. Yet, the fixed costs are not attached the product costing because they change often. The use of these methods has its benefits in accounting; and will leave much to consideration in decision making by many managers working in production. Here as follows are some of those benefits and a possible decision-making consideration that can be beneficial in a low biding by competition in a manufacturing industry.
Benefits of the Two Methods According to Articlebase.com in an article titled “Absorption vs. Variable Costing”, there are benefits to each cost methods in accounting. In Absorption costing the benefit of it would be that a company can have an inventory of finished goods. These finished goods are a part of the fixed overhead and will not show the expense until the goods are sold. When this takes place it will generate a profit for the period. In variable costing it will indicate profits after all the bills have been paid. Although the company probably has not received any revenue some can potentially be in its inventory. When these goods are finally sold they will generate a surplus income.

Decision-making in Competitor’s Low Biding The best cost method to use in competition’s aim in low biding of a product a company produces would be the variable costing method. Under absorption costing the company is able to recognize fixed costs and product costs. However, absorption costing will increase the cost of output. Thus, in the goal to make the competition buy into your product it does not help with acceptance of the price. Consequently, in this scenario the type of accounting decision-making can only be resolved in the use of a variable costing system.
Conclusion
Choosing the appropriate costing methods in whatever industry that deals with production is an important consideration in accounting. Profitability is directly proportional to the manufacturing and labor that is used by a company. Therefore, it is imperative that on the business perspective it fully needs to become cognitive of the production that is needed, labor costs, and materials that it needs to make a complete product. Whatever costs methods chosen it needs to be relatable to the business realm that it is being used in and effective in its use by managers and accountants. In essence this will ensure good decision-making as it fills orders and sells to vendors that will utilize a company’s final product of its goods and services.

References
Absorption vs. Variable Costing Retrieved from http://www.articlesbase.com/management- articles/absorption-costing-vs-variable-direct-costing-5353059.html…...

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