Managerial Accounting - Assignment Example

The net operating income in 2014 by Variable Costing Method is higher than that found by Absorption Costing Method because the inventory decreased in 2014. In any case when inventory increases, by Absorption Costing Method, the net operating income will be higher than that found using Variable Costing Method (Ray, 2014). 4. In 2013, the Net Operating Income (NOI) using Absorption Costing is 3335 dollars higher than the value got using Variable Costing method. The difference results from the fixed manufacturing overhead that is added to the ending inventory under Absorption Costing method.

A part of fixed manufacturing overhead is absorbed by the ending inventory hence cuts down the burden of the current period. That is, a part of fixed cost of the present period is taken to the next period. As claimed by MM to having used the Variable Costing Method to arrive at the price that results into a profit of $5 (105-100) per Bike since the production cost of a Bike is $100 by Variable costing Method. Variable Costing method (VCM)is preferable for internal decision making such as pricing.

This is because VCM provides managers with relevant information necessary for preparing contribution margin income statement. This leads to more effective CVP analysis, Cost Volume Price analysis (Jacqueline, 2012). VCM separates Fixed and variable costs thus managers are able to determine contribution margin ratios and points such as target profit points and break-even points and even carry out sensitivity analysis. On the other hand Absorption Costing Method (ACM) is recommended for reporting profit stakeholders.

This is because financials statement prepared by the ACM conforms to the GAAP; thus auditors accept the statements. Additionally, ACM assigns fixed cost to units of products hence this allows stakeholders to match costs to revenues(Jacqueline,