Learn the fundamentals of how to use various accounting techniques to determine the cost of a product and how it's useful to overhead and profitability factors.
Determining the cost of goods sold is an important part of analyzing profitability. In manufacturing surroundings, there can be a lot of variables involved in producing the final product. This article looks at the two most common cost accounting methods for determining the cost of finished goods.
Manufacturing Accounting - Absorption Costing Method
Absorption costing is a method of determining what the actual costs are associated with producing the final product. Virtually all costs and expenses associated with a finished manufactured product are figured into determining the unit cost with the absorption method. There can be many factors involved to determine the actual cost to produce a single product the following is a list of some of the cost considerations used.
Manufacturing Accounting – Variable Costing Method
Unlike absorption costing, which regards as all manufacturing costs for inventory value, the changeable costing method does not consider fixed costs related with producing the final product. Only materials, labor and variable manufacturing transparency costs and expenses associated with a finished artificial product are figured into finding out the unit cost. Fixed expenses are not shaped into the finished product cost by means of variable costing method.
Profitability Factors - Absorption Costing vs. Variable Costing
Using absorption against variable costing for the ended product will have different effects on gross profit as stated on the income statement. Since fixed costs aren’t figured into the cost of goods by means of the variable method, the list value will be less than using the incorporation method. Because the inventory value is less, a higher gross profit will be understood when the products are sold using the variable costing process.
Variable costing may not be adequate for external reporting of the income statement for income tax principles. A CPA or tax professional should be consulted before implementing the variable costing method. Inventory costing methods will also have an effect on asset valuation as reported on the balance sheet.
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