Costing Methods

Costing Methods

There are two costing methods studied in Chapter 19: absorption costing and variable costing. Absorption costing is the standard for use in the generally accepted accounting principles (GAAP) for external reporting (Kimmel, Weygandt, & Kieso, 2011).

Variable or absorption for this company

In the scenario given, absorption costing would be the better option. Products under absorption costing “absorb” all costs, including the fixed costs. As a result, the income statement prepared under absorption costing has a net loss of only $4,956 compared to the variable costing income statement net loss of $41,898. The net loss in either case will signal a red flag, but the absorption costing net loss is significantly less than the variable costing net loss. (Kimmel, Weygandt, & Kieso, 2011).

Benefits of variable and absorption costing

There are some potential benefits and times to use each different method. For example, if the number of units that has been manufactured is greater than the number of units that have been sold, the absorption costing method will show a higher net income in the income statement. Conversely, it might be beneficial to use variable costing when the units that have been sold outnumber the units that have been manufactured since the net income in this income statement will be higher than under absorption costing (Wink & Corradino, 2010). This is not due to the costing method, however, since another benefit of variable costing is that it is not affected by the output of products by a company. It is also in line with cost-volume-profit (Kimmel, Weygandt, & Kieso, 2011).

Costing method for bidding and competition

The best method to use in bidding for a product is variable costing. Under this method, cost per product is less than that