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Acc 561 - Costing Method Paper

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Costing Method Paper

R M Butler



Linda Moore

Costing Method Paper

The Polk Company builds custom lures for sporting goods stores. In their 1st year of operation, the company sold only 80,000 fishing lures, for $25 dollars each. However the Polk company produced 95,000 lures, and had an excess of 15,000 lures, but by using absorption costing they will be able to calculate the per unit costs.

In this case would it be better to use the variable or absorption method, and why? Variable costing or absorption method is first of all a costing approach in which only variable manufacturing costs are product costs and fixed manufacturing costs are expenses. The absorption costing is all the manufacturing costs are charged to the products. However in this case it would work out better for the Polk Company to use the variable method, since the company already uses parts of the variable method to calculate manufacturing costs.

What are the benefits of the two methods?

Absorption costing and variable costing cannot be substituted for one another because both systems have their own benefits and limitations. However almost all successful companies throughout world use both methods, the variable cost method is mostly used by internal management for decision making purposes.

Which method would lead to the best decision when a competitor is submitting a lower big for your product?

Absorption costing will be the best decision however both methods are used companies. In variable costing the expenses will remain constant; the absorption method treats fixed production costs as period costs. Normal manufacturing costs are considered product cost and are included in the product inventory. The variable costing method will help with the demand based pricing decisions.



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