SONIM TECHNOLOGIES 1
Variablecost is the expenses incurred by a manufacturing company directly,for example labor expenses, raw materials expenses and overheadexpenses. These costs are not constant as they increase or decreasedepending on how much the manufacturing company is churning outproducts. When the manufacturing plant is hundred percent working,then the workers` salaries go up because they are many compared withwhen it is operating sixty percent or below. The ratio of consumptionof raw materials is directly proportional to the requisite productionthat tends to increase the production costs as it escalates.Absorption costing includes all production expenses as product costs,irrespective of whether they are variable or fixed.
Inabsorption costing, a part of fixed manufacturing overhead isdesignated to each unit of product. These two costings are notsimilar costings methods however nearly all successful manufacturingcompanies globally utilize both the methods. None can be substitutedfor another because variable costing and absorption costing each oneof them have their limitations and benefits. They are identified byseveral names namely direct costing, marginal costing being variablecosting while full costing, or traditional costing being absorptioncosting.
Inproduction variable costing information is utilized for internalmanagement decision-making purposes only while absorption costing isused by internal management including external bodies for examplegovernment agencies, creditors and auditors among others. Asignificant difference occurs when absorption costing is used in amanufacturing company a higher net income number is realized ratherthan variable costing whenever products produced are more thanproducts sold (Weygandt et al, 2009, p. 265). A clear, distinct linebetween absorption costing and variable costing is how fixedmanufacturing overhead is reported. In using variable costing fixedmanufacturing overhead is itemized as a period cost whereas inabsorption costing the same is itemized as a product cost.
In manufacturers of rugged toughest phones, utilizingabsorption costing will encompass fixed manufacturing overhead as aproduct cost, every product that are unsold stays in the endinginventory. This will incorporate a portion of fixed productionoverhead costs as an asset item on the balance sheet. Variablecostings itemize fixed manufacturing overhead expenses in the mannerof period cost every fixed manufacturing overhead costs are reportedon the income statement when incurred. In this way, if the quantitiesof units manufactured are more than the amount of units purchased,absorption costing will result in a higher profit for SonimTechnologies. To explain absorption and variable costings, assumethat manufactures a phone for gas workers, calledSonim 100. The selling price is $20 per unit, manufactured 30,000however sold is 20,000 beginning inventory zero. Variable unitscosts in production $9 broken down as Direct materials $5, variableoverhead $1 and direct labor $3. Selling and administrative expenses$2 while fixed costs production overhead $ 120,000 subsequentlyselling and administrative expenses $ 15,000. This is what Jerry JWeygandt et al. (2009) wrote….
Themanufacturing cost per unit is $4 higher ($13-$9) for absorptioncosting. This occurs because fixed manufacturing overhead costs are aproduct cost under absorption. Under variable costing, they are,instead, a period cost, and so they are expensed. Based on thesedata, each unit sold, and each remaining in the inventory is chargedunder absorption costing at $13 and under variable costing at $9 (p.264).
Thegeneral norm in accounting principles is that the requirement thatabsorption costing be utilized for the costing of inventory forexternal management reporting purposes. Net income measured underAccepted Accounting Principles (GAAP) in absorption accounting isregularly employed internally to measure performance, evaluate newprojects or justify costs reductions. (Weygandt et al. 2009, p. 270).In the performance evaluation, there is a flaw that perhaps a seniormanager could use to cover up therefore affecting the companynegatively. This usually occurs when a corporation uses absorptioncosting method for decision-making. Assume, for example, a seniormanager`s compensation is benchmarked upon the region`s net income.In this scenario, the manager could decide to meet the net incometargets by significantly increasing production. This overproductionwill increase the manager`s compensation, however the buildup ofinventories over a period will result in additional costs to thecompany. Variable costings prevent this occurrence because net incomeunder variable costing is not impacted by changes in productionlevels (Weygandt et al. 2009, p. 270).
Variablecostings furnish managers with the information necessary to makeready a contributive margin income statements consequently resultingto more efficient cost volume profit (CVP) analysis. Drawing a clearseparate line between variable and fixed costs, managers are capableof determining contribution margin ratios, to perform sensitivity,break-even points and target profit points analysis. When a companyuses absorption costing approach only in doing cost reduction, thenthe CVP analysis will be wrong as it meets the USA GAAP requirements.However, it is not of much use for appropriate decision-makingpurposes. The equilibrium of manufacturing and sales over a lengthyperiod, both costing methods will show similar profit because thesame amount of fixed production overhead will be expensed.
Weygandt,J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerialaccounting: Tools for business decision making.John Wiley & Sons.