Motorola is a manufacturer of smartphones, which it supplements with a unique system of accessories. As such, it uses cost-based pricing, with each unit costing a set amount of money to produce and selling at a fixed price. It can use either absorption or variable costing for its financial statements, with both options having some advantages and disadvantages. This answer will not decide on which method is superior, but it will compare the two based on their pros and cons.
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Absorption costing is often considered the default method for accountants to enter product costs into their financial statements. In it, the product absorbs all manufacturing costs directly, regardless of whether they are direct or indirect. According to Weygandt, Kimmel, Kieso, and Aly (2018), the method provides a full and accurate picture of a product’s cost by taking all the components that form it into account. Additionally, one can use it to increase the net income by moving fixed overhead costs to the balance sheet. However, absorption costing ignores the differences in indirect resource usage and may lead to inconsistencies.
Variable costing only counts direct materials and labor as well as variable overhead as product costs. According to Hilton and Platt (2017), the approach is better than absorption costing for operational analyses that separate fixed and variable costs. It can also help represent product costs that correlate with the direct inputs and provide an easily comprehensible picture. However, by ignoring fixed overhead, the approach can understate the product’s price. As such, results obtained using this method can be misleading,
Hilton, R.W., & Platt, D.E. (2017). Managerial accounting: Creating value in a dynamic business environment (11th ed.). New York, NY: McGraw-Hill.
Weygandt, J.J, Kimmel, P.D., Kieso, D.E., & Aly, I.M. (2018). Managerial accounting: Tools for business decision-making (5th ed.). Hoboken, NJ: John Wiley & Sons.