Reply to this discussion post article review. Use at least one reference
According to Hilton, & Platt (2017), variable cost is a cost that changes in total in direct proportion to a change in an organization’s activity while variable costing is a method of product costing in which only variable manufacturing overhead is included as a product cost that flows through the manufacturing accounts (i.e., Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold). Fixed manufacturing overhead is treated as a period cost. This article demonstrates several changes to activity-based costing (ABC) and displays how these methodologies will develop the significance of the ensuing product costs to both long-term and short-term decision making. ABC was developed to enhance the distribution of indirect production costs to products and to aid in the management of these costs. There were those that felt that a single cost pool allocation of overhead resulted in product costs that did not mirror the mishmash of resources that are involved with the production of each product. This essentially resulted in “peanut butter” costing over costed some products and under costed others This paper uses a numeric example to liken various alternative methods to overhead distribution. It also will look at variable activity-based costing (VABC) that will show how these systems can generate data that is valuable during decision making and show that the subsequent costs are greater to outmoded variable costing for decision-making purposes.
This journal highlighted traditional and activity-based costing (ABC) systems which is an accounting method that includes fixed overhead costs in the cost of goods sold by allocating an equal portion of the overhead cost to each finished unit of inventory that includes fixed and variable production and product cost. For me, the closest thing I can figure out about Southwest Airlines cost that changes in relation to variations in an activity is their Wannagetaway (WGA) fare structure. If you go on the website, you will notice that the prices for the other two fare classes do not move while the WGA fluctuates from a low price to a high price. What makes up product pricing and output is contingent on a careful separation of the fixed and variable components of costs. This separation is what happens during managerial decision-making. This separation is appropriate when allocating overhead f there is a discrepancy. Generally, the person of authority will not be able to evaluate the impact of their decisions on profitability without the separation of fixed and variable components. This mingling of fixed and variable overhead costs bring about product costs that are problematic to use in decision making. This journal uses a numeric example to examine alternative methods to overhead allocation. It features variable activity- based costing (VABC), which makes use of regression analysis to approximate the fixed and variable portions of each cost pool. This journal concluded how VABC can generate information that is better at decision making and the resulting cost allocations are better to traditional costing approaches for the purposes of decision-making.
Geiszler, M., Baker, K., & Lippitt, J. (2017). Variable activity-based costing and decision making. Journal of Corporate Accounting & Finance, 28(5), 45-52. doi:10.1002/jcaf.22277
Hilton, R. W., & Platt, D. E. (2017). Managerial accounting: Creating value in a dynamic business environment (11th ed.). New York, NY: McGraw-Hill Education.