Absorption accounting method according to E Notes (n.d.) “is a method of accounting where all costs of the manufacturing are included and are allocated to the produced units”. This would include fixed, variable and mixed costs. This type of accounting would allow a more accurate figure to supply to upper management about their product and what the bottom line is. This is the most important factor in Absorption accounting. The variable method is beneficial because it provides an output that is closer to the actual cash flow of a business. If a business is short on money this may be a better alternative. Absorption costing is particularly useful for firms that do not sell their entire yield during the manufacturing period, as is the case with Polk. Under absorption costing, the cost of a good is not shown until the good has been sold. This can be a drawback if a portion of the goods produced are not sold, as the company would still have to know the actual price of these that were left over. In this case, it would be better to use the absorption method because this method integrates only the operating expense that is due to the 81,300 units sold. The variable method counts fixed overhead as a time expense, meaning that the fixed overhead for this period is calculated on the basis of the 96,100 units produced, if the absorption method is used. The variable method only computes fixed overhead on the foundation of the 81,300 units that were sold. This provides management with a more accurate picture of the yield of the fishing lures.
Absorption Accounting. (n.d.). Retrieved from http://www.endnotes.com