This analysis seeks to discuss the meaning of absorption, variables and throughput costing, and when each of these would be applicable. The researcher will also provide concrete examples to enable the reader to have a good grasp of the three concepts.
Presentation of Analysis
It is worth mentioning about full absorption costing where is a cost method in managerial accounting. In this approach, the aim is to expense the entire costs involved in the manufacturing process of a given product.
The generally accepted accounting principles (GAAP) recommend organizations use the full absorption costing method when doing external reporting. Other scholars refer to it as the “full costing method also very useful when calculating taxes and sales’ reports (Jawahal 24).
In the full absorption costing approach, raw materials or labor only constitute part of the cost. This also encompasses other costs such as direct types involved in the production of a product as the cost base (Jackson, Sawyers & Jenkins 45). Variable costing plays a significant role in the management’s decision making while absorption costing assists in financial reporting among others (Jackson, Sawyers & Jenkins 46).
In line with the findings above, absorption costing plays a significant role when an investment intends to determine whether a retail price clearly depicts the costs that would go to the production of a good. On the other hand, the limitation with absorption costing is that managers are capable of raising production levels without considering the total sales (Jackson, Sawyers & Jenkins 48).
Variable cost serves as a corporate expense that varies with the output of production. In the same vein, variable costs refer to costs whose variation depends on the company’s volume of production. In this regard, they increase as production expands and decrease as production goes down. Important to note is that variable costs are not the same as fixed costs. In general, the fixed and variable costs add to the total cost (Weygandt, Kimmel & Kieso 34). Direct material/labor costs translate to variable costs especially if the former is required to improve a given project; for instance; in the case where an organization has variable costs deriving from the packaging of a product. Thus, as the production of the product increases so will its costs for packaging and it would decrease where such reduces.
In throughput costing, the focus is only on the recording of direct materials as inventory costs; therefore, the rest of the manufacturing costs, for instance, direct labor and variable factory overhead are recorded as period costs (Weygandt, Kimmel & Kieso 37).
It has been shown that absorption costing is an approach that seeks to include entire expenses extending to overheads in the computation of the cost involved in the production of goods and services. It was stressed that GAAP recommends organizations use absorption costing when presenting their financial statements to the shareholders and investors. On the other hand, GAAP does not recommend variable costing though most companies still use it. In throughput costing, it was seen that the approach involves costing a product but then only where “unit-level direct costs” are extended to it.
Jackson, Steven, R. Sawyers & J. Jenkins. Managerial Accounting: A Focus on Ethical Decision Making, Cengage Learning, 2010. Print.
Jawahal, Lal. Cost-Accounting. Tata McGraw-Hill Education. 2009. Print.
Weygandt, Jerry, P. Kimmel & D. Kieso. Managerial Accounting: Tools for Business Decision Making, John Wiley & Sons, 2009. Print.