Polk Company is in the business of selling custom fishing lures. Recently they decided to introduce a new product. Before they introduce the product they would like to know if variable or absorption costing is the best method for the company.
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Variable and Absorption Costing Method
Absorption costing is when all manufacturing costs are absorbed by the product and shows a higher net income (Kieso, Kimmel, & Weygandt, 2011). Based on the 80,500 lures Polk Company sold in 2012, absorption costing is the preferred method to use because they have a higher net income compared to the variable method.
The benefit of absorption costing for Polk Company is they will show a higher net income of the products in inventory that are not sold immediately. On the contrary, if Polk Company uses variable costing they see any profit or loss almost immediately because all expenses are paid during the current accounting period, even if all the products are not sold.
Competition and Bidding
Absorption costing is the better costing method for Polk Company to use against a competitor who has submitted a lower bid. As stated previously, absorption costing does not require Polk Company to show any expenses on the products they are offering in the bid because they do not have to show expenses until after the products are sold.
In conclusion, Polk Company should introduce the new fishing lures by using the absorption costing method, and for submitting product bids.
Kieso, D., Kimmel, P., & Weygandt, J. (2011). Accounting: Tools for Business Decision Making, 4e (4th ed.). Retrieved from The University of Phoenix eBook Collection database.