Organizing Public Good Provision Lessons From Managerial Accounting

Question: Discuss about the Organizing Public Good Provision for Lessons From Managerial Accounting? Answer: Introduction For a small business, the amount of profit is determined by the proper utilization of variable cost and absorption cost (Weygandt et al. 2015). An organization must understand the implication of each costing method that can be utilized in the organization. Each of the methods of costing, whether absorption or variable, is valid under the principle of Generally Accepted Accounting Principle (GAAP). In this assignment, variation involving absorption costing and variable costing will be presented, and an organization will be selected for analyzing the best costing method. Difference between absorption costing and variable costing All types of costs that an organization is bearing falls under absorption cost, which are fixed costs and cost of production. On the other hand, according to Needles Crosson, (2013), the types of variable costs that are related to organizations production fall under the variable costing. Certain companies that use variable costing keep the fixed costs and overhead costs separate from the cost of production. The types of fixed costs that distinguish abortion costing and variable costing are related to overhead expenses (Islam Hu, 2012). These costs include building rental and salaries that do not change with the level of production. An organization has to pay the utility bills and office rent every month was not considering whether it produces a thousand products or not a single product. The ideal pricing is not considered perfectly by variable costing as variable costing does not consider all the types of costing that an organization has to bear, and thus profitability is not achieved (Kwak et al. 2015). On the other hand, variable costing helps an organization to find out which product will deliver more profit while manufacturing than the other will. Absorption costing helps an organization to comply with the generally accepted accounting principles (GAAP). Absorption costing helps an organization to calculate and file its taxes. Absorption costing helps an organization to account for its net profitability specifically when the organization sells different products in a different accounting period (Khalil Simon, 2014). Through absorption costing, an organization does not get into account of the amount of profit that it will achieve for different product lines. Using Absorption Costing and Variable Costing An organization selected for this analysis is Bullard Company, which is the producer of clock radios. This organization uses Just-in-time method for production and thus it has a never-ending amount of inventory. The costing process is differentiated into three months. Month 1: Quantity of units produced equally with quantity of unit sold From the figure, it is identified that while the quantity of produced units is equal to the quantity of sold units, then the total profit is $90,000, which can be identical by both of the costing methods. With the help of absorption costing, fixed mechanized operating cost are entirely expensed as all the units that are created are sold (there is no ending inventory). On the other hand, with variable costing, fixed mechanized operating cost are treated to be the phase costs and so are constantly disbursed in the phase occurred. Just for the reason that all the costs are treated as the same without taking into account of the costing method utilized, profit is identical. Month 2: Quantity of units produced is greater than the quantity of unit sold In this month, absorption costing shows the higher profit. A fraction of fixed manufacturing overhead costs is found to be retained in the ending inventory, which is considered as the asset in the balance sheet, until the goods are sold. On the other hand, considering variable costing, the fixed manufacturing overhead costs is expensed in spite of a number of sales. Thus, when the quantity of unit production exceeds the quantity of sales, then the variable costing shows lower cost and higher income. The dissimilarity in amount of revenue by the two method = $ 4,000 [$ 79,000 - $ 75,000] Month 3: Quantity of units produced is lesser than the quantity of unit sold Using variable costing, $ 40,000 for fixed manufacturing overhead costs persists to be disbursed, as all the 10,000 units that are created are sold. For an additional 1000 units, $4,000 are pulled from the inventory in the third month is also expensed. Thus, it can be identified that when less amount of units are produced, then, absorption costing results in lower profit and higher cost. The difference amounting to profit in between two methods = $ 4,000. [$105,000 - $ 101,000] Method of costing to be used For the particular organization explained above, Absorption costing as to be utilized. With the help of such costing, the organization will be able to keep the right account of income in the balance sheet as soon as the inventory is required to be replenished. The absorption will help the organization when to sell its manufactured products at the time of accounting period (Brady Burrows, 2013). Each of the products in the inventory has the fixed overhead value, and the manufacturer assigns a per-unit price of each of the fixed expense. The organization will be able to show the amount of expense until the items in the inventory are sold or processed out. This costing method will help in improving the amount of profit in the organization. The organization will be able to keep a current record of its profits regarding the amount of inventory that is involved. The organization is using the just-in-time method and thus the amount of inventory is to be recorded from time to time and accor ding to the amount of inventory, the revenue generated will be kept as a record in the balance sheet and thus, cash flow will be controlled (Arruada Hansen, 2015). Conclusion From the above discussion, it can be identified that both absorption and variable costing is required for an organization. Still, it has to be considered that absorption costing will affect in the profit figures, as the costing process will artificially inflate the profit. This is because, for the organization considered above, the manufacturer will not deduct the total amounts of fixed overhead costs, if the manufactured products are not sold. This will hamper in the profit and loss statement, as it will not denote the total amount of expenses that the manufacturer had in one particular phase. Reference List Arruada, B., Hansen, S. (2015). Organizing public good provision: Lessons from Managerial Accounting.International Review of Law and Economics,42, 185-191. Brady, T., Burrows, R. (2013). An Instructional Case For Courses In Financial Accounting, Auditing, Managerial Accounting, Ethics, And Fraud Examination.Journal of Business Case Studies (JBCS),9(4), 337-342. Islam, J., Hu, H. (2012). A review of literature on contingency theory in managerial accounting.African journal of business management,6(15), 5159. Khalil, M., Simon, J. (2014). Efficient contracting, earnings smoothing and managerial accounting discretion.Journal of Applied Accounting Research,15(1), 100-123. Kwak, W., Shi, Y., Lee, C. F., Lee, H. (2015). Group Decision-Making Tools for Managerial Accounting and Finance Applications. 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