Definition Of Absorption Costing

In this document I am going to explain the definition of cost and the difference between absorption costing vs. variable costing, and also if overproducing is an ethical practice or not. Also I will be showing some calculations and data to explain a get a better idea of this entire situation and how we can resolve some problems in management accountant. Cost is the monetary value of goods and services expended to obtain current or future benefits. The way that a cost will be used defines the way it should be computed.

Essay Example on Definition Of Absorption Costing

When we talk about cost we need to be specific about what we are talking about. (Atkinson, 2007) Absorption costing means that the manufactured costs are absorbed by the units produced, also it can be known by full costing because is the costing of a finished unit in inventory. It treats all costs of production as production costs regardless if they are fixed or variable; direct materials, direct labor and variable and fixed overhead.

(Accounting for management, 2010) Variable costing is a costing system under which those costs of production that vary with output are treated as product costs.

This would usually include direct materials, direct labor and variable portion of manufacturing overhead. (Accounting for management, 2010) Variable costing is often useful for management’s decision-making. However, absorption costing is required for external financial reporting and for income tax reporting. (Averkamp, 2010) Not matter the costing method that we use, either in the absorption or variable costing the variable and fixed selling and administrative expenses are treated as period costs and are deducted from revenues as incurred.

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Now, do I think that overproducing is an ethical practice, well it depends for whom? When the stakeholders do investments they look the income statement. If this is high or goes up they will be ok with the decision but if they need to pay for something like the expenses they might think that the company is hiding some information and they will be disappointed, in other words, they will think that this is not an ethical action because they can be lying. Now I am going to present the calculations required for this project.