The Managerial Accounting - Essay Example

Inventory absorbs a portion of fixed overheads which reduces the current period burden. This means that a part of the current fixed costs is transferred to the following period.
When using the variable method of costing, fixed costs of manufacturing are not included in the cost of the product. The costs are fully charged in the income and expenses of the current period. This, therefore, means that the ending inventory does not absorb any portion of the fixed costs (Harris, 2000).
Absorption costing
Reconciliation Statements 2013 2014
Net income from the variable method of costing $ 40,000 $32,000
Fixed deferred overhead costs $ 26.7* 500= $ 13,350 $53.3*500=$ 26,650
Net income under the absorption costing method = $ 53,350. $ 53,320 (Lal & Srivastava, 2009).

5 For 500 bikes
Under absorption costing, the total income for the organization will be
2013 2014
Sales $ 128.04* 500=$ 64,020 $159.96*500 = $ 79,980
Costs $ 106.7* 500 = $ 53,350 $ 133.3 *500 = $ 66,650
Income =$ 10,670 =$ 13,350

From the above calculations, it is evident that the organization will make profits.
6. The best advice would be to incorporate both methods of costing in the operations of the company. Absorption costing should be used in reporting the income of the company to its stakeholders while variable costing methods should be used in pricing (Harris, 2000). This is because including fixed and variable costs in pricing can easily lead to making improper decisions. Read More