Variable and absorption costing methods are two different costing methods. Almost all successful companies in the world use both methods. Variable costing and absorption costing cannot be substituted for one another because both the systems have their own benefits and limitations (Accounting for management). This paper will complete and discuss exercise 19-17 in Wiley Plus: it will discuss the following questions: In this case, would it be better to use the variable or absorption costing method, and why? In this example Polk Company should use the absorption method, because the absorption only uses overhead that allocates to the 80,000 units sold. Whereas the variable method counts the fixed overhead as a period expense, the fixed overhead during this period is calculated on 95,000 units produced, when the absorption method is used. The variable method just calculates fixed overhead on 80,000 units sold.
What are the benefits of the two methods?
Both systems have their own benefits and limitations. The absorption method gives management information of product cost this is the main benefit of the absorption method. The benefit of the variable method is it gives an output the mimics the cash flow of the company. Which method would lead to the best decision when a competitor is submitting a lower bid for your product? The absorption method would be best although both methods are used, with variable costing expenses remains the same, and with the absorption method fixed production cost are period cost. Variable costing method helps with demand based pricing.
Accounting for management. (n.d.). Variable costing versus absorption costing. Retrieved from http://www.accountingformanagement.org/variable-vs-absorption-costing/