Question

For your essay for week 5 on absorption costing make sure you discuss absorption costing and how it compares with variable costing and the pros and cons of each.

Answer 1

In absorption costing, all direct and indirect manufacturing expenses are allcoated to the products manufactured.

In variable costing, all VC are allocated to the products manufactured in the period. This addresses the issue of absorption costing that allows income to rise as production rises,

Pros of Absorption Costing:

• Considers fixed cost also
• independent on the sale
• Exact cost per unit is determined

Cons of Absorption Costing:

• May inflacte profits
• May lead to over production to bring the cost per unit down

Pros of Variable Costing

• It considers only VC, thus profit is not inflated even if ending inventory is at higher value
• Under this method, over production is not done to reduce the cost and the basic cost consist only of VC

Cons of Variable Costing

• Fixed mfg cost is completely remains unaccounted
• Not as per requirements of GAAP