Costing Methods Paper

Costing Methods Paper

Costing Methods Paper

Completing an exercise evaluating cost methods allows examination if variable costing method or absorption costing methods are most suitable for an organization.  Exploring which costing method is better, why that costing method is better, and which of the costing method has the most benefits is a great tool.  Having knowledge, of which method would be best, will prove valuable before entry into a real life situation involving costing methods.

Absorption costing or a full costing is a costing method where all manufacturing costs are engrossed in the product.  A different costing method is variable costing. When using variable costing fixed manufacturing overhead costs are considered period cost and not product cost.  Similar to the absorption costing method direct materials and labor, and variable manufacturing overhead belong to product cost.

In the exercise manufacturing cost per unit for 2012 using variable costing is $16.49.   Variable costing income statements for 2012 show a net loss of $42,717. Manufacturing cost per unit for 2012 using absorption costing is $19.08.  The income statement using absorption costing shows a net loss of $6,198. Manufacturing cost per unit is 2.59 higher using absorption costing.

Completing an exercise evaluating cost methods show that as long as the product produced are greater than the product sold absorption costing is the best costing method.
Variable costing does have advantages such as the presentation of the variable costing income statement allow costs to be easier to identify.  Also, net income under variable cost is not affected by number of units produced. However, despite the advantages of variable costing, as you can see from the two income statements the absorption costing method is the better method to use.  Absorption costing results in a much less net loss, and a higher net income number than if using variable costing. Because the units manufactured are greater than the units sold the income under absorption costing will be higher and the better costing method when considering the two costing approaches.