ACC 550 Cost Accounting
Megan Rall
Southern New Hampshire University
Milestone #2
II. Inventory Management
A. After reviewing the characteristics of absorption and variable costing, I believe absorption costing is the ideal cost allocation method to use for New Hampshire Company. Absorption costing is explained as a process for gathering the costs connected with a manufacture process and allocating them to specific products. A product may absorb a wide-range of fixed and variable costs. These costs are not documented as costs when an organization pays for them, instead when they remain in inventory until the product is sold. After the product is sold, they are then charged to cost of goods sold. Absorption costing varies from variable costing because in variable costing only the direct variable costs of manufacturing a product are considered, making fixed manufacturing costs a period cost "Variable Costing Versus Absorption Costing - AccountingExplanation.com", 2011)
For New Hampshire Company the inventory cost per unit for is $4.90 variable costing, lower than $7.60 for absorption costing. This is because it covers fixed manufacturing costs. Still, if New Hampshire Company produces more inventory than they are selling, under absorption costing, the operating income will surpass variable costing because fixed manufacturing cost is recorded into inventories at price per unit. Following the sale, the fixed manufacturing will credit out. When practicing absorption-costing income statements are not required to identify variable and fixed costs. New Hampshire Company’s operating income is $54,000 greater operating using absorption costing matched against variable costing. This is a result of all manufacturing costs being included in the inventory costs contrasting in absorption costing where fixed manufacturing overhead were considered variable cost by designating a per unit expense of the fixed overhead to every unit of production. Keeping in mind that if they supply inventory higher than they sell, under absorption costing, the operating income will be greater than variable costing because fixed manufacturing cost is documented into inventories at price per unit. For this reason, the leaders will produce more inventory in order to boost their organizations achievement.
Overall, if there is a boost in inventory throughout an accounting period, less operating income will be reported in variable costing than absorption costing. Equally, if inventory decreases, additional operating income will be reported in variable costing than absorption costing.
B. Describe how this method should be used by decision makers to fulfill their responsibilities. Support your response with examples.
It is worthwhile and less complicating for leaders to practice one universal approach of inventory costing both externally and internally for reporting and performance appraisal. Doing this limit any leader from operating in a manner which may generate their performa...
