Question

How important is it to trace costs appropriately? Explain. As you are beginning to think about the importance of tracing costs appropriately, please consider the differences between variable costing and absorption costing. What implications does each of these have on such things as financial reporting of profit and pricing your products for the marketplace? You may also want to think about the issues involved with traceable costs as discussed in our text or in articles that you may find online

Answer 1

Tracing the cost is very important because it identify actual cost allocable to each department in order to identify the most efficient department or activity and the bottlenecks ones. Determines the actual performance of the departments.

Variable costing is a method in which costs are divided into two pools fixed and variable. Variable rate is determined basis of machine hours or labor hours and fixed costs are assigned at a blanket rate. This helps in identifying the department providing the best contribution.

Absorption costing on the other hand have only one cost pool of all the direct and indirect cost and all the costs are assigned to the departments on the basis of one blanket rate. This may lead to overallocation to some department and under allocation to some. Thus may lead to overpricing of some products and underpricing of some products which may not be correct.

Variable costing whereas gives a better measure of pricing.