Polk Company Essay

363 Words2 Pages
In this case, would it be better to use the variable or absorption costing method, and why? In the case of the Polk Company, it would be better to use absorption costing method, because it only includes overhead that is allocated to the 80,600 units sold. The absorption costing method will show lower loss to help keep the confidence of the shareholders in the company. Absorption costing will give a true and fair view of the financial position of the Polk Company. The variable method will count fixed overhead as a period expense, such as fixed overhead for this period is calculated on the basis of the 95,500 units that are produced. Using the absorption method will give management a clearer picture of the fishing lures profitability. What are the benefits of the two methods? The benefits of absorption costing are that it recognizes fixed costs in product cost. As it determines the price of the product, and the price based on absorption costing does ensure that all costs are covered. Absorption can provide management with accurate information concerning product cost. The variable method is beneficial by providing an output that is closer to the cash flow of the company that may be short on cash flow. Variable costing aids in the analysis of cost-volume – profit by separating the variable and fixed in the income statement is another benefit. Which method would lead to the best decision when a competitor is submitting a lower bid for your product? The absorption cost method will show the profitability and will provide the best references concerning how much money the company will make as compared to the bidder who has the lowest bid. Absorption costing will be more useful to companies that do not sell all of its products manufactured during a certain period. By using absorption costing the cost of the product, is not going to be shown until the time that

More about Polk Company Essay

Open Document