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MGMT 312 Managerial Accounting Embry Riddle Aeronautical University Module 5 Research Paper Victoria Ridge Samanta Shoes, which was launched by entrepreneurs Samanta and Kelvin Joseph, produces high-quality shoes in unique styles and limited quantities. Selling prices for a pair of Samanta Shoes can range from $100 per pair to $350 per pair. Based on information in this chapter’s opening, identify at least four examples of the types of costs that likely explain the wide range of shoe selling prices. Be sure to justify your responses, not just show a listing of costs. The founders of Samanta Shoes use variable costing in their business decisions.

If Samanta Shoes used absorption costing, would you expect the company’s income to be more than, less than, or about the same as its income measured under variable costing? Explain. Your paper should be from one to two pages in length. It should be well-thought out and free of spelling and grammatical errors. Be sure to state the reasons for your answers.

You may wish to explain the difference in variable and absorption costing in explaining your difference in income. Use the following Research Paper Format: Times New Roman, with 12-point font size Double Spaced 1-inch report margins References Wild, J. J., Shaw, & W, K. (2014). Managerial Accounting. Irwin: McGraw-Hill.

Paper For Above instruction

Victoria Ridge Samanta Shoes, founded by entrepreneurs Samanta and Kelvin Joseph, embodies a niche in the footwear market by offering high-quality, uniquely styled shoes in limited quantities. The substantial variability in the selling price, ranging from $100 to $350 per pair, reflects various cost factors and strategic positioning. Understanding the nature of these costs and the implications of using different costing methods—variable versus absorption—is essential in analyzing the company's financial performance and pricing strategies.

Types of Costs Explaining Price Variability

To justify the wide range of shoe prices, it is vital to identify specific costs that influence pricing decisions. The first significant cost factor is materials and fabrication costs. High-quality materials, such as premium leather or specialized fabrics, significantly influence production expenses. Limited edition shoes often incorporate unique or exotic materials that are more costly, thereby justifying higher prices. These costs are directly proportional to the number of shoes produced, aligning with variable costs, as they increase with the level of output.

Secondly, design and customization costs contribute to the price difference. Limited editions and unique styles often require specialized design labor and customization, which are often more expensive. These costs are often variable or semi-variable, depending on whether additional design work is needed for each pair, thus impacting the unit cost based on the shoe’s style or complexity.

Thirdly, marketing and branding expenses can explain the price variability. Limited releases often involve premium marketing campaigns, exclusive branding efforts, and celebrity endorsements, which inflate initial costs for specific models. These marketing costs typically serve as fixed or semi-fixed costs allocated over the limited production batch, but their premium nature can influence the final selling price significantly.

Lastly, distribution and retail markup also contribute. Limited editions are often sold through exclusive outlets or high-end boutiques, incurring higher distribution costs and retail margins. The exclusivity adds intrinsic value to the shoes, enabling premium pricing. These costs, including retail markup, are variable and directly influence the final retail price.

Impact of Using Absorption Costing on Income Measurement

Samanta Shoes currently employs variable costing, which considers only variable manufacturing costs when determining product costs. If the company switches to absorption costing—which allocates all manufacturing costs, including fixed manufacturing overhead, to the product—their reported income could change. Generally, under absorption costing, fixed manufacturing overhead costs are absorbed into inventory costs and only recognized as expenses when the inventory is sold.

If the company's production exceeds sales during a period, absorption costing typically results in higher reported income. This is because some fixed manufacturing overhead costs remain in unsold inventory on the balance sheet, deferring expenses and inflating net income relative to variable costing, which expenses all fixed manufacturing costs in the period incurred. Conversely, if sales exceed production, the company might report lower income under absorption because inventory reductions mean fixed costs from previous periods are recognized as expenses.

In the context of Samanta Shoes, because the company produces limited quantities of distinct styles—likely with some degree of overproduction to maintain supply—adopting absorption costing would generally lead to higher income figures during periods of inventory buildup. This occurs because fixed manufacturing costs are deferred within inventory assets, not expensed immediately. Conversely, if inventory levels decrease, income will be lower under absorption costing as more fixed costs are recognized during that period.

Therefore, the primary difference in income measurement under variable versus absorption costing hinges on how fixed manufacturing overhead is treated. Variable costing provides a clearer picture of the contribution margin per unit, facilitating more effective decision-making. Absorption costing, although compliant with GAAP for external reports, can obscure profit variability due to production volume fluctuations, especially when inventory levels change significantly (Wild, Shaw, & W, 2014).

In conclusion, the choice of costing method has significant implications for reported income and managerial decision-making. Given the limited production runs and unique pricing strategies of Samanta Shoes, variable costing offers advantages in analyzing profitability at the product level. However, understanding the impact of fixed manufacturing overhead allocation under absorption costing is vital, as it influences net income fluctuations and the assessment of operational efficiency.

References

• Wild, J. J., Shaw, W., & W, K. (2014). Managerial Accounting. McGraw-Hill Education.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
• Hilton, R. W., & Platt, D. E. (2016). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
• Anthony, R. N., & Govindarajan, V. (2017). Management Control Systems. McGraw-Hill.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Accounting Effectively. Harvard Business School Press.
• Anthony, R. N., & Govindarajan, V. (2014). Fundamentals of Management and Cost Accounting. McGraw-Hill.
• Wairimu, J. (2020). The effect of costing methods on financial performance of manufacturing firms. International Journal of Financial Studies, 8(3), 59.
• Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.