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Costing Methods
Absorption costing and variable costing are two costing methods companies can utilize to
present their financial data to managers and investors. The costing method used by each
organization have their advantages and disadvantages that will have a sizable impact on the
institute if not utilized carefully. Whether a company absorbs their fixed costs into various items
produced or keeps their fixed costs separate from the expenses associated with the actual price to
create products, could have short-term and long-term benefits for the company (Kimmel,
Weygandt & Kieso, 2015). Here are some examples of organizations that use one or more
costing methods and how it affects their team.
James Cardinal – Nike
Nike uses variable and absorption costing within the organization to track costs.
According to Kimmel et al. (2015), two primary methods of product costing are compared. One
is variable costing, and another is absorption costing. The difference According to Kimmel
(2015) is both approaches is that fixed manufacturing overhead is removed from the cost of
products under variable costing but was included in the cost of goods under absorption costing.
Absorption costing is used because variable costing is not allowed for external reporting or tax
purposes. Maverick (2016) states the Generally Accepted Accounting Principles (GAAP) require
absorption costing for external reporting. According to Kimmel (2015) some organizations use
variable costing this is practical on performance measurement through eliminating the blow of
constant change in inventory levels from financial results. According to the article, “What are
some of the advantages and disadvantages of absorption costing?” (2015) absorption costing also
provides a company with more gain than variable costing. This is primarily if products remain
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unsold during the period when they are manufactured. This can be especially important for Nike
when production is increased well in advance of an anticipated seasonal increase in sales.
The article, “What are some of the advantages and disadvantages of absorption costing?”
(2015) noted that using the absorptions costing absorption costing emphasized on total cost
namely both variable and fixed, it is not so useful for management to use to make the decision,
planning, and control. According to Maverick (2016), this is necessary for the leadership teams
to ensure that that they are looking at the right information to run the business.
Kimberly Edwards – The Big Three
Automakers have long used a method of overproducing some cars they make to boost
profits while keeping up with their short term sales goals. By overproducing their product, the
automakers will add on the costs of advertising and the costs of holding on to all of their extra
