StudentShare solutions
Triangle menu

Criticism of Absorption Cost System - Math Problem Example

Nobody downloaded yet

Extract of sample
Criticism of Absorption Cost System

As common sense would have it, fixed cost remains fixed no matter what the level of production is. Hence, in such a case managers often tend to over produce thinking it’s better to allocate the fix overhead over a wider range of output and reducing the cost per unit (since spreading fixed cost over greater units tends to drive down fixed cost per unit and when fixed costs per unit go down then so does the overall costa per unit), thus seeking an increase in profit per unit of output. The lower fixed cost per unit does of course increase the level of profitability. But a couple of factors need to be considered while making the overproduction decision. While over producing tends to allocate fixed cost over a greater units of output, we need to see whether we really need to over produce. Many factors would need to be considered including the demand for the excess produce, storage and handling costs, cash flow situation etc. There would be no point going for over production if there is no sales market for additional units or the storage costs are high as such a step might actually cost more than the saving done by allocating the fixed overheads on excessive production. It also needs to be considered that what would happen to the excess inventory that would be produced. If the company has not taken care of the market conditions and consequently it produces in excess of its projected sales, then such an exercise would result in excessive stock piling. Clearly the company wouldn’t be profitable in such a scenario. Another key question that needs to be answered is whether the incentive to overproduce allows over producing stock irrespective of stock piling or storage conditions. The excessive inventory that would be produced would be visible to everyone, reflected on managerial accounts as well as in the company’s audited financial statements. It is no doubt important for managers and decision makers to consider here whether the allocation of fixed overheads provides an incentive to overproduce or not. However the danger reflected by the incentive to over produce should not be made the basis of decision making about the allocation of the fixed overheads. I agree with your view that over production results in excess inventory. Yes, sometimes it does happen that excessive production is done at the year-end so that the production costs can be driven down and financial statements are efficiently window dressed to show a good position of the company. However you need to know that there are some products that take a lot of time to be produced and their fixed costs are extremely high. In such a case, I personally think that over production is justified provided there are adequate storage facilities and there is an active sales market. Student’s Response: “In my experience allocations which are confined to fix overhead is the catalyst to overproduce a less than desirable product. There are two things that definitely go wrong. 1. When management have an incentive to decrease the cost of product, usually this is a force step toward decrease quality of all resource used to make a final product with less capital and in less time. ...Show more


Student’s Response: “The answer certainly depends on the market. Baring an abnormal demand serge for a particular product at the end of a fiscal year, overproduction results on excess inventory. Since on traditional costs allocation systems overhead is distributed to the entire production, overproduction hides the higher costs of production in the excess inventories…
Author : ghowell
Criticism of Absorption Cost System essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the math problem on your topic
"Criticism of Absorption Cost System"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Cost Benefit Analysis
In most cases such inefficiencies are caused by monopoly pricing or taxation (Brent 89). In other words, a deadweight loss can be termed as the total surplus resulting from market distortion especially from the side of government regulations on prices and in most cases the levied taxes.
12 pages (3000 words) Math Problem
Responsibility Accounting and Transfer Pricing
For example, a metal fabrication press, which bends and shapes metal, was bought seven years ago for $522,000. The company will add l9 percent to this cost, representing the change in the wholesale price index over the seven years. This new, higher cost figure is depreciated using the straight-line method over the same l2-year assumed life (no salvage value).
4 pages (1000 words) Math Problem
Aborption Cost Systems
The student has selected a very good example of a manufacturing concern that implements the job order costing system in order to account for the cost of every job completed. In airplane manufacturing, each job, which is supposedly the complete manufacturing of a plane, requires substantial cost which primarily include material and highly skilled technical cost.
1 pages (250 words) Math Problem
Activity Based Cost accounting system
Activity Based Costing encourages managers to watch activities or functions that are value added . These are operational acts that help identify the activities or functions that get customers. Management should study cost drivers in decision making.
4 pages (1000 words) Math Problem
This cost has been calculated on the basis of traditional costing system. The Direct Material cost and Direct Labour has been calculated on the basis of total production units. The overhead costs have been allocated to products on the basis of traditional costing system.
3 pages (750 words) Math Problem
Math hw4
According to Porter, differentiation is one of the winning strategies in the market which a company can utilize in order to compete with other players by stressing product attributes that sets it apart from its competitors. Cost leadership strategy entails pricing at par or even below the industry average in order to gain market share but also delivery of a certain level of product or service quality.
2 pages (500 words) Math Problem
A Linear Programming
4 pages (1000 words) Math Problem
Cost flow assumptions and effects of inventory errors
2 pages (500 words) Math Problem
Companys Distribution System
1. Given the status quo, the estimated distribution costs for the company in the following quarter is $ 194,060 subdivided into $92,252 from the plants to the distribution centers and $101,808 from the distribution centers to the customer zones all over the country.
3 pages (750 words) Math Problem
Free cash flow model of valuation estimates value of a firm based on its fundamentals. The company is expected to pay its shareholders based on intrinsic value of the firm. In addition, this value is reflected by net present cash flow. It’s
3 pages (750 words) Math Problem
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Click to create a comment
Contact Us