No Plagiarism Please: Read In Full And Write 500 Words That
No Plagiarismplease Read In Fullwrite 500 Words That Resp
No Plagiarismplease Read In Fullwrite 500 Words That Resp
NO PLAGIARISM....PLEASE READ IN FULL* Write 500 words that respond to the following questions with your thoughts, ideas, and comments. Be substantive and clear, and use examples to reinforce your ideas. Discuss what absorption , variables , and throughput costing are. Determine when each would be used. Provide an explanation and example of all three. Include citations.
Paper For Above instruction
In managerial accounting, various costing methods are employed to determine the total cost of production, facilitate decision-making, and analyze financial performance. Among these methods, absorption costing, variable costing, and throughput costing are prominent, each serving different purposes and providing distinct insights into production costs and profitability. Understanding these methods involves exploring their definitions, uses, and specific examples to appreciate their roles in managerial decision-making.
Absorption costing, also known as full costing, is a method where all manufacturing costs—both fixed and variable—are allocated to the cost of produced goods. This means that direct materials, direct labor, and both variable and fixed manufacturing overheads are absorbed into the cost of each unit. It is primarily used for external reporting purposes, such as financial statements, because it complies with generally accepted accounting principles (GAAP). For example, if a company produces 10,000 units with total manufacturing costs of $500,000—comprising $300,000 variable costs and $200,000 fixed costs—then each unit would be assigned a cost of $50 ($500,000/10,000 units). Absorption costing ensures that all manufacturing costs are considered when determining the cost of goods sold and inventory valuation, which affects net income as reported on financial statements (Garrison, Noreen, & Brewer, 2018).
Variable costing, often called direct costing, differs notably from absorption costing by only assigning variable manufacturing costs to the product. Fixed manufacturing overhead costs are treated as period expenses and are deducted in the period incurred, not allocated to units. This approach offers a clearer view of the contribution margin and is often used internally for decision-making, such as cost-volume-profit analysis and profitability assessments. For instance, using the previous example, under variable costing, each unit would still carry a cost of $30 for direct materials and labor plus variable overheads, but fixed overheads ($200,000) would be expensed directly in the period. Managers utilize variable costing to analyze how changes in production levels impact profitability without the distortions caused by fixed cost allocations (Horngren, Datar, & Rajan, 2015).
Throughput costing, also known as super-variable costing, is the most simplified approach and emphasizes throughput, or the rate at which a system generates profit through sales. It considers only direct material costs—the bottleneck of production—as product costs, while all other expenses are regarded as period costs. The primary goal of throughput costing is to maximize throughput and identify constraints in production processes. For example, if a company produces a single product with $10 material cost per unit, and selling price is $20, throughput costing would treat only the $10 as cost, focusing management efforts on increasing sales or reducing material costs to boost profit. This method is especially useful in environments with tight constraints or bottlenecks, such as lean manufacturing, where the focus is on optimizing throughput rather than detailed cost allocations (Shank & Govindarajan, 1992).
Each costing method has specific contexts for application. Absorption costing is used when preparing external financial reports to comply with regulations. Variable costing is preferred for internal decision-making because it provides clearer insight into marginal profitability and the impact of sales volume changes. Throughput costing is ideal in constrained environments where simplifying cost analysis helps identify where to focus improvements to enhance throughput and overall profitability.
In summary, absorption costing allocates all manufacturing costs to products, suitable for external reporting. Variable costing isolates only variable costs, ideal for internal analysis. Throughput costing highlights throughput and bottlenecks, best for environments focused on maximizing production efficiency. Recognizing the different applications of these costing methods enables managers to make more informed decisions aligned with their strategic goals.
References
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
Horngren, C. T., Datar, S. M., & Rajan, M. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson.
Shank, J. K., & Govindarajan, V. (1992). Strategic Cost Management: The New Tool for Competitive Advantage. Free Press.