Reference no: EM131240854

Assignment: Variable costing Vs. Absorption costing;

1. The GAAP approved two methods to determine the companies' profitability and how they can report this information: These methods are the variable costing and absorption costing.

Fixed overhead costs; are the costs that do not change with the level of production. For instance; the rent, insurance, and wages. These costs will continue no matter what level of the sales.

The absorption costing: in this method, the fixed costs can be part of the manufacturing costs. This is done on a per-unit basic.

The variable costing: in this method, the fixed costs are a lump sum, rather than a per-unit, expense. For instance, the supplies, raw material, and the shipping. The full cost of fixed overhead is added.

Advantages & Disadvantage of Absorption Costing: Since the cost is assigned per unit amount for fixed expense, any extra unit produced and not sold (they are still part of your inventory). The expense will not be shown until they are sold. As result, this will help to show more profit for that period. The disadvantage it that this method can reflect inflate numbers as the company can thing that they profit improved, when this is not real.

Advantages & Disadvantage of Variable Costing: By using this method, the profit is shown after all the bills have been paid for a specific period of time. Even though, some products can be in the inventory and may be the revenue has not been received for those products; the reports show that the company paid for all the bills and when the products are sold, the company will show an excess (surplus) income. The disadvantage is the full payment of the fixed - overhead expenses. Thus, the items not sold must deducted the full cost of the fixed overhead. Showing less profit for that period because of the unsold products full expensed for overhead.

Reference:

Hearst Newspapers, LLC. (2016). Advantages & Disadvantages of Using Absorption Vs. Variable Costing. Retrieved from https://smallbusiness.chron.com/advantages-disadvantages-using-absorption-vs-variable-costing-34282.html

Poll

2. Does your current organization use CVP Analysis or Break Even Analysis? If so, what kinds of information has been gained from using these techniques?

Ethical Considerations

3. Kenny Hampton is an accountant for Bartley Company. Early this year Kenny made a highly favorable projection of sales and profits over the next 3 years for Bartley's hot-selling computer PLEX. As a result of the projections Kenny presented to senior management, they decided to expand production in this area. This decision led to dislocations of some plant personnel who were reassigned to one of the company's newer plants in another state. However, no one was fired, and in fact the company expanded its work force slightly.

Unfortunately Kenny rechecked his computations on the projections a few months later and found that he had made an error that would have reduced his projections substantially. Luckily, sales of PLEX have exceeded projections so far, and management is satisfied with its decision. Kenny, however, is not sure what to do. Should he confess his honest mistake and jeopardize his possible promotion? He suspects that no one will catch the error because sales of PLEX have exceeded his projections, and it appears that profits will materialize close to his projections.

Who are the stakeholders in this situation?

Identify the ethical issues involved in this situation.

What are the possible alternative actions for Kenny? What would you do in Kenny's position?