Management Accounting Essay Example | Topics and Well Written Essays - 1500 words

Management Accounting - Essay Example You should refer in your answer to parts (a) and (b) of the question which should be included in the appendices to the report. In the absorption costing system, all the three products seem to have made a substantial profit (BALAKRISHNAN, SIVARAMAKRISHNAN, & SPRINKLE, 2008, pp56-67). The key issue with absorption costing systems is with timing; fixed manufacturing overhead costs are charged against revenue when units are sold. As seen in (a) above, all manufacturing  overhead costs are included in the  calculation of product unit cost. This forms the basis of the costing system in absorption costing. All of a product’s  manufacturing costs, both variable and fixed,  are said to be ‘absorbed’ by the product. Under absorption costing, a certain amount of  fixed manufacturing overhead cost is applied to each unit of output. As with the case in (a) above, under absorption costing unit manufacturing cost  included direct material, direct labour, applied  v ariable manufacturing overhead and applied  fixed manufacturing overhead. Consequently, when each of the  units is sold the fixed overhead cost per unit is  included in the expense ‘Cost of goods sold’ as shown in the tables above (BALAKRISHNAN, SIVARAMAKRISHNAN, & SPRINKLE, 2008, pp56-67). Therefore, apportioning overheads using absorption costing is profitable for all the three products. On the other hand, we can include only the  variable manufacturing costs in product unit cost  and to treat fixed manufacturing overhead as  a period cost i.e. as an expense on the income  statement as the case in (b) above. This system is known as variable  costing also known as direct costing. We will  now examine affects profit determination (BHATTACHARYYA, 2011, pp45-100). Fixed manufacturing cost is not treated as a product costs under variable costing. Rather, fixed manufacturing cost is treated as a period cost and, like selling and administrative expenses, it is charged off in its entirety against revenue each period. Consequently the cost of a unit of product in inventory or cost of goods sold under this method does not contain any fixed overhead cost (LUCEY, 2003, pp78-89). Under variable costing, all variable costs of production are included in product costs. Thus if the company sells Baltic at 217.25 unit of product, only 217.25 will be deducted as cost of goods sold, and unsold units are carried in the balance sheet inventory account at only 217.25. This realizes a loss of 75.13. This is a result of excluding fixed production costs when costing yet they are part of the total production costs. With variable costing, the total amount of fixed manufacturing overhead cost is  expensed in the current accounting period, irrespective of how many