Management

Managerial Acconting

Product prices mean both fixed and variable factors and the cost unit bears a full burden of all the costs. The paper focus to illustrate the validity of the variable and absorption models of costs of production, which determines the levels of profitability of a product. It outlines the justification for difference in profits when using variable and absorption costing systems.It is imperative to note the main difference in profits when using variable and absorption costing systems. In absorption costing methods, fixed overhead costs are applicable to manufacturing costs, calculated per unit. That is, fixed costs divided by the units manufactured and sold over a period considered during costing. It results to the cost, per unit, of every unit that the firm manufactured or sold over a period.In variable costing, the fixed overhead is applied as a lump sum expense, rather than a unit. The fixed overhead include the summation of all variable costs such as raw materials and supplies among other costs. A sum of fixed overhead costs over a period is added. Instead of figuring the expenses on a unit basis, they are subtracted from the revenue as a lump sum figure. The unit profit calculated under absorption costing, therefore, is lower than that calculated under variable costing.Managements have interests that each product should have its total cost, both fixed and variable, and still generate profits. For every business, generating profits is the key target. If a product does not give benefits, then the management may consider discontinuing production over time. That implies that a product needs to recover all the costs involved in its production as well as provide returns to warrant profitability. Not all the goods provide the same contribution towards profitability. Some products may sell at a cost that covers variable costs to the maximum levels but fail to meet

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