Absorption and Variable Costing, Inventory Management

Absorption and Vari fitted cost be very important tools for cost accounting. Both of these be methods al dissever you to see the cost of your stock certificate, in a different way. For example the concentration method allows you to assign all be to the harvest-home, while changeable be allows provided inconsistent cost to be assigned to the mathematical product. Inventory caution is extremely important as well beca use it ties into efficiency and lowering your cost so that your comp either hobo be as do goodable as it freighter in operations.Throughout this paper I will discuss the brilliance of both cost methods, how it is implemented as well as using the income statement for be. Most companies dont necessarily look at the be of all departments they break down the departments into separate entitys called net centers. The companies do this because by breaking down each department they can see if there ar any problem atomic number 18as that they should correct, involving the performance of the unmarried profit centers. To look at the overall smart sets performance, al most(prenominal) people find it useful to look at the income statement.However, this income statement is of half-size use for determining the viability of the individual business units or segments. Instead, it is important to initiate a segmented income statement for each profit center. That is why these deuce costing methods have been developed. One of them is based on variable costing and the other is based on ducking costing. They argon costing methods because they constitute to the way in which product be are determined. Product cost are inventoried and they include bring materials, deal labor and strike.Period cost are expensed in the full point they are incurred. These are usually interchange and administrative expenses or other expenses to run your union day to day. The one diversity in the midst of the two costing systems is contumacious grind viewg raph. Absorption costing is a costing system that assigns all manufacturing cost to the produce, including frigid grind smasher. Absorption costing includes direct materials, direct labor, variable operating expense, and stiff smash. The quaternion costs define the cost of the product. Under immersion costing, fixed strike is viewed as a product cost, not a period cost.Fixed bang is assigned to the product through the use of predetermined fixed overhead rate and is not expensed until the product is exchange. Absorption costing has product costs of direct materials, direct labor, variable overhead, and fixed overhead. While the period costs include just dispenseing and administrative expenses. Variable costing assigns only the variable manufacturing costs to the product these costs include direct materials, direct labor, and variable overhead. As you can see variable costing stresses the divagation between fixed and variable manufacturing costs.Fixed overhead is than tre ated as a period expense and is excluded from the product cost. The designer for this is because fixed overhead is a cost of staying in business. After the period is over, any benefits provided by this content are expired and are not inventoried. Fixed overhead of any period is than seen as expiring in that period and is charged in descend against r crimsonues for the period. The product costs for variable costing include direct materials, direct labor and variable overhead. The period costs include fixed overhead, and selling and administrative expenses.Now we move onto the relationship between the variable costing income and the dousing costing income. The relationship changes as the take and the sales change. If you sold much than was produced, variable costing income is greater than the absorption costing income. except if you sold more than you produced that would mean that you were selling the beginning inventory and units produced. Under the absorption method, the uni ts that are coming out of the inventory have the fixed overhead from the period attached to the inventory.So the amount of the fixed overhead expensed by absorption costing is greater than what the current periods fixed overhead by the amount of fixed overhead flowing out of the inventory. The variable costing income is greater than the absorption costing by the amount of fixed overhead coming out of the beginning inventory from the current period. But if the production and the sales are tally than there is no inconsistency between the two reported incomes. The income relationship is consider to be that if production is greater than sales than the absorption income is reater than the variable income. But if the production is slight than the sales than the absorption income is less than the variable income. So than if the production equals the sales than the absorption income is also equal to the variable income. The differences between the absorption and variable costing are the recognition of when the expenses are occurred. The recognition of the expenses associated with the fixed factory overhead. With the absorption costing, the fixed factory will than be assigned to the units produced.This genuinely presents two problems, first, how do we convert the factory overhead applied on the basis of direct labor hours or the machine hours into factory overhead applied to the units produced? Also, what is than done when actual factory overhead does not equal applied factory overhead? Now we move onto the variable costing and the segmented income statements. The variable costing is a useful tool in preparing a segmented income statement because it gives us useful information on the variable and fixed expenses. A segment can be considered a division, department, product lines, customers class among other things.In the segmented income statements, the fixed expenses are small down into two categories direct fixed expenses and the common fixed expenses. The redund ant subdivision highlights controllable versus the non-controllable costs and than enhances the managers ability to assess each segments contribution to the overall firms performance. The direct fixed expenses are the fixed expenses that are directly traceable to a segment. They are sometimes referred to as avoidable fixed expenses, because they disappear if the segment is eliminated.Two or more segments jointly cause common fixed expenses. These expenses persist even if one of the segments to which they are common is eliminated. The segment margin is a profit contribution that each segment makes toward covering a firms common fixed costs. The segment should be at least able to cover both of its own variable costs and direct fixed costs. A negative segment margin drags the firms nitty-gritty profit down. Segment income statements are useful in management decision-making. The reason so is so that you can run your alliance at the most efficient level, while raising your profit margi n.This is a very interest topic because it helps show the importance of inventory control and how it affects your operating income. The inventory management is very key to a company. The reason for this is because when your costs are to high and your profit margin is too low than there is in all likelihood a reason of your inventory being to high or the overhead being to high. The stress of inventory management cannot be understated for numerous companies but especially manufacturing companies. Apart from the product cost of the inventory, there are other graphemes of costs that relate to inventories of raw materials, work in process, and the spotless goods.Inventory must be bought, received, stored, and moved. The inventory related costs include the fill for a product that is known with near certainty for a period of time. Two major costs are usually associated with this, if the inventory is purchased from an foreign source, then the costs are referred to as ordering costs an d carrying costs. If the product is produced internally, then the costs are called setup costs and carrying costs. Ordering costs are the costs to place and receive the order. Carrying costs are costs of keeping the inventory in your warehouse or store.There also can be a third categories, which includes stock out costs, which are the costs of not having a product available when demanded by the customer or the cost of not having a raw material available when involve for production. A company that uses these types of costing methods will definitely have a better grasp of the costs associated with their products. This will help a company become more efficient and have a better belief of which product is making the most money and which product is making the least amount of money.Yet again, this is not used for your company as a unhurt usually but it is used for each product individually. So if I had a red yoyo and a ballpark yoyo and was selling a lot of each and equal than I would break them down individually between red and green and possibly see that the green yoyo is more expensive a product and therefore I would either have to sell it at a higher prices (even though it is exactly the same product except the color), or I would have to stop selling the green yoyo and just sell the red yoyo.In order to run any type of company a manager must show extreme fearfulness to the inventory management, because you can have the best selling product on the market but if your not efficient enough with your inventory than you may put a huge damper on the future of your company and not allow your company to grow properly. I think if managers use all of these techniques they will have better understanding of there company and how to exercise the correct inventory management.