Question

How might the Apple Company use the Variable Costing method and Absorption Costing method on Apple's latest devices such as the iPhone XR? What are the positives and negatives of both of these methods?

Answer 1

Variable costing is also known as marginal costing is the costing where direct costs and variable manufacturing costs are applied to the end product, whereas absorption costing is the costing method where all product-related costs, whether fixed or variable are considered for product costing and valuation.

Apple can use the variable costing method as:-

a). Can classify the expenses based on nature whether they are fixed or variable.

b). Treat their fixed cost as a period cost and measure the profitability of different products say iPhone XR by its PV Ratio and not by Net Profit Ratio.

c). Here it can show the total contribution and contribution of each product.

d). One of the advantages of this costing method is the difference in the quantity of opening and the closing stock will not affect the unit of production.

e). Here only fixed o/h expenditure variance can be computed, no volume variance since fixed overheads are not absorbed here.

Also, it can use Absorption costing method as:-

a). Here it will consider all the product related costs, whether fixed or variable for product costing.

b). It will classify the expenses on the basis of functions i.e. Production, Administration, Selling and Distribution.

c). Fixed costs are charged to cost of production. Each product will bear a reasonable share of fixed costs and therefore the profitability of a product is influenced by the apportionment of fixed cost.

d). Net profit of each product is determined after subtracting fixed cost along with variable cost.

e). Here disadvantage will be that the difference in opening and the closing stock will affect the unit cost of production due to the impact of fixed cost.

f). Here advantage will be that all the fixed OH variances can be computed and reported.