Absorption and variable are two costing methods used in accounting; both costing methods have advantages and disadvantages. In absorption costing manufacturing costs being absorbed by the product. Product costs under variable accounting include direct labor, material costs, and variable manufacturing overhead. The Polk Company used variable and absorption costing to generate income statements.
Both the variable and absorption income statements showed net income at a loss. The absorption income statement recorded a higher net income; because manufacturing overhead costs are part of the ...view middle of the document...
Variable accounting is consistent with cost-volume-profit (CVP); net income does not change with production levels, making it easier to see the impact fixed and variable costs have on net income. With variable costing, net income is tied to sales level, not production levels. The presentation of a variable cost income statement allows for easier identification of cost and their effect on business.
Variable costing allows managers to see how costs affect business and include fixed manufacturing costs, leading to better business decisions. With absorption costing some fixed production costs are deferred as part of the inventory, tempting management to overproduce. “When production exceeds sales, absorption costing reports a higher net income than variable costing” (Kimmel, Weygandt, & Kieso, 2011, p. 1003).
Variable accounting allows managers to see how cost affect the business, allowing the manager to make better decisions. Absorption costing allows for reporting of higher net incomes and is a generally accepted accounting principle for reporting net incomes. For reporting net income, the Polk Company will use the absorption costing method. To determine how costs impact business decisions, the Polk Company will use the variable method of costing because it's close relationship to CVP, and net income is tied to sales levels, not production level.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision
making (4th ed.). NJ: John Wiley & Sons