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# ACC 561 Week 5 Costing methods paper

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ACC 561 Week 5 Costing methods paper
In this case, would it be better to use the variable or absorption costing method, and why?
What are the benefits of the two methods?
Which method would lead to the best decision when a competitor is submitting a lower
bid for your product?
Absorption Costing vs Variable Costing
In comparison to absorption costing which is used for external
purpopses and which is required by accounting standards, variable
costing is a costing tool that is used for internal decision-making
purposes.
The logic of variable costing differs from absorption costing as it assigns
only variable costs to inventory and cost of goods sold. When using
variable costing your product costs would therefore consist of Direct
Material, Direct Labor, and Variable Manufacturing Overhead. With
variable costing variable SG& A expenses, and fixed SG&A expenses
are classified as period expenses new is that also fixed manuf. OH
costs are assigned to period costs.
Since variable costing and absorption costing classify costs differently,
the per unit costs that are calculated under each system differ. On the
slide you can see an example of a situation where product costs under
absorption and variable costing are calculated. When taking a look at
absorption costing and variable costing you notice that the per unit cost
differs by \$4. Let’s take a look how the different prices are calculated.
For absorption costing you take direct material for \$5 into account, you
add \$4 for direct labor, then you add variable manuf. OH for \$1, then you
take fixed MOH per year which are \$20,000 and divide them by sells, in

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this case 5,000 units and you get \$4 which have to be added to the unit
costs. As a result you get \$14 per unit.
Under variable costing you disregard fixed MOH and simply add up
direct materials, direct labor, and variable MOH. Our final per unit cost is
therefore \$10. You might also remember from your cost accounting class
that not only per unit costs differ but that also your net operating income
might differs under each system which can be a result of inventory
changes.
The great advantage of variable costing and the reason why it is used
for internal decision making processes is that it provides a better
understanding of the effect of fixed costs on net profits. Whereas with
absorption costing fixed MOH costs might be hidden in inventory level
under variable costing total fixed cost for the period are completely
shown on the income statement.
It is also helpful when doing a cost volume profit analysis. Ana will later
tell you how exactly you can use the variable costing logic to calculate
your Break-Even Point.
Making decisions under variable costing might look simple but such
decisions are actually very tricky as managers might neglect that fixed
costs have to be recovered and that recovering variable costs is not
enough. Margins have to be high enough to eventually recover all costs.
Using variable costing can be beneficial but it takes considerable
business savvy to make profitable decisions.
Cost Methods Evaluated
* What strategies and tactics did the management of Super Bakery, Inc.
use to increase sales and growth?
Management of Super Bakery Inc. increased sales by combining the
external companies together with the parent company for maximized
values and work flow. These values include:
* Minimum investment
* Staffing expenses
* Fixed assets

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* Working capital.
The growth of the company consists of controlling the quality and costs
of services, which was not easy when the costs increased for orders in
different parts of the country. The high profit margins were subsidizing
orders with low profit margins and the Super Bakery needed a system to
assign costs to each order correctly.
* Why did Super Bakery’s management think it was necessary to install
an ABC system? Do you agree with their reasoning? If you disagree,
identify your recommended costing system, including your rationale, to
management.
I agree with the Super Bakery for installing the ABC system. Activity-
Based Costing or the ABC system is ideal for the Super Bakery because
this system leads to more pool costs, leads to enhanced control over
overhead costs, and leads to management making better decisions.
Cost pools are beneficial to the Super Bakery because the costs are
assigned according to the cost driver of each product. With the ABC
system overhead costs are directly traced to activities. This helps
management control these activities and generate costs efficiently.
Finally, the ABC system has much better cost accuracy. Management
can set prices at maximum profitability, and management can easily
decide whether to purchase or eliminate a product by the cost.
* Would a job order cost system or a process order cost system work
best for Super Bakery. Include the why and why not?
A job order cost system and a process order cost system would not work
for Super Bakery, Inc. for different reasons. A job order cost systems
would not work simply because the system will assume direct labor
costs, and probably would not accommodate outsourcing. The process
order costs system counts the hours as activity that is an overhead
(Kimmel, Weygandt, & Kieso, 2009). A job order and process order cost
system are both beneficial however they do not have the same support
for a company as activity-based cost system would.
Job costing is a product costing system when costs are accumulated by
specific job orders and assigned to batches of products. In other words,
manufacturing costs are assigned to specific job, specific customers,
specific orders, specific projects, and specific contracts. Job costing is

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