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Discussion Topic 1: Absorption vs. Variable Costing
In this week’s discussion, we will examine the effects of absorption costing and variable costing on net income.
Harris Company’s fixed overhead costs are $4 per unit, and its variable overhead costs are $8 per unit. In the first month of operations, 50,000 units are produced and 46,000 units are sold. Write a short memo to the chief operating officer explaining which costing approach will produce the higher income and what the difference will be.
Just do response each posted # 1to 3 down below only
Posted 1
Hello Class and Instructor,
MEMO
To: Chief Financial Officer
Dear Sir or Madam
To completely understand the absorption vs. variable costing, it would best to define both. It mainly pertains to the allocation of manufacturing costs and its effect on reporting of net income. Under the absorption costing method, sales and marketing expenses are treated as a period cost, and hence expenses are recorded as and when incurred. In the variable costing method, product cost includes just the direct costs and variable manufacturing costs.
If the variable cost was used with the Harris Company, then or cost of sales would be more and decrease profit. On the other hand, if the absorption cost is used, the out cost would be low, and revenue would increase. Because of the increase in revenue, the absorption cost approach would be better to apply for the simple reason it has a fixed overhead that is deductible per unit basis. The difference in net income would be: (50000 – 46000) x4 = 16000.
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