Question

You have studied the two costing methods and the cost equation. Please answer one of the following related questions:

1. Discuss the differences between variable costing and absorption costing.

2. Why is it important to understand a products cost equation?

3. Does a products cost equation change throughout its lifecycle? if so, why?

4. Which method is accepted by GAAP? why do you think this method was selected?

Answer 1

1 Difference between absorption costing and variable costing:

Variable costing (direct costing)- Under this costing method fixed manufacturing overhead costs are expensed off in the period in which they are incurred.

Absorption Costing(Full costing method)- Fixed manufacturing overhead costs are expensed when the product is sold.

Variable costing method applies to all direct costs as well as variable manufacturing overhead costs to the end product.
These costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold.
Fixed manufacturing overhead costs are expensed during the period in which they are incurred.
You can also call variable costing-direct costing or marginal costing.

Absorption Costing method applies all direct costs and both fixed and variable manufacturing overhead costs to the end product.
All of these costs move with the product through the inventory accounts until the product is sold, at which point they are expensed on the income statement as costs of goods sold.
You can also call absorption costing as full costing

Importance of Product cost equation
Product costing is the process of assigning costs to inventory and production based on the expenses that go into producing or buying inventory. It is an especially important process for manufacturers, and there are several potential costing methods that businesses choose for their simplicity, accuracy or other factors. If a business contracts out accounting services, the accounting firm may offer in-depth product costing analysis as part of its service

2. Importance of Cost Equation

A cost equation is a mathematical formula that a company can use to predict the expenses associated with the production and sale of a certain amount of goods. The formula typically incorporates constant overhead costs as well as variable costs that depend on the volume of sales. To use the cost equation, companies input sales volume in place of the equation's variable and solve for the cost of production

1. Accuracy
Accuracy refers to how effectively the business can trace its business expenses through product costs and to the correct inventory values. Product costing analysis can help increase the accuracy of this process, especially when it comes to variable costing, which only assigns product units the variable costs associated with their creation and leaves fixed costs to other expense accounts.
2.Applications
Businesses use their cost equations to determine how much a certain amount of sales will cost the company. This allows the company to determine the price it must charge for a certain number of goods in order to break even
3. Project Tracking
When a company assigns costs to various stages of a project and keeps an eye on product budgets to see whether the costs are matching the expectations, this is known as project tracking.

Answer 3. Yes a products cost equation changes throughout its lifecycle. As a firm can't run through the same equation of costing when they are at the start of business and continue till the business is going.
They've to strategise their costing equations as per the growth and degrowth. When a company starts their main focus on costing is to provide maximum amount of product to be reached to the customer so their main focus is to increase the supply and thus making the equation according to that.
When product is stabled they have to choose the equation so as to earn profit and maximise their business and so on the products cost equation changes over the time.

For question number 4 I request you to please provide the GAAP country if it is U.S then There are three common methods for inventory accountability costs: weighted-average cost method; first in, first out or FIFO; and last in, first out or LIFO. Companies in the United States operate under the generally accepted accounting principles, or GAAP, which allows for all three methods to be used.
According to Accounting Standards Code 330-10-30-9 under GAAP, a company should focus on the accounting method that best and most clearly reflects "periodic income." This provides considerable leeway for companies to maximize their after-tax revenues based on inventory costs.