Costing Methods
It would be preferable to use absorption costing method. Absorption costing applies some of the fixed costs when determining per unit cost. In this instance, the fixed manufacturing overheads have been applied proportionately to the units manufactured and sold. The fixed manufacturing overheads are applied to all the units that have been manufactured. This ensures that the cost of the units sold during the accounting year is not inflated by applying all of it to the sold units as is the case with variable costing (Davis & Davis, 2012). A proportion of this cost is charged to the closing inventory in accordance with matching principle of accounting. Variable costing indicates that all the fixed overhead costs have been accounted for even for the unsold units. This reduces net income for the period and the purposes of performance analysis; it might indicate a poor performance even if that is not the case.
Absorption costing has the benefit of improving the profits posted for a period especially when the manufacturing firm does not manage to sell all the manufactured goods. This is because per unit costs are assigned for fixed expenses which mean that expenses are recognized in the income statement once the units manufactured have been sold. Variable costing, on the other hand, has the advantage of showing a better picture of the incremental costs that are associated with a given product. It gives producers accurate representation of the costs of production. Variable costing emphasizes on the fact that fixed overheads are incurred regardless of the quantity manufactured and, therefore, should not be emphasized when making product decisions (Davis & Davis, 2012).
Variable costing method would guide to the best decision. It is because manufacturing fixed overhead costs are always incurred regardless of the quantity produced, and it is, therefore, important to put more emphasis on variable costs when determining the price of the product.
References
Davis, C., & Davis, E. (2012). Managerial accounting. Hoboken, N.J.: John Wiley & Sons.
