Question

Create a response to the following discussion post:

Although the absorption format helps the income statement look more simplified, I do not feel this is the best way to obtain the information the management is looking for. “Absorption costing treats all manufacturing costs as product costs, regardless of whether they are variable or fixed” (Garrison, E.W., & Brewer, 2018). With the management team wanting to find their break-even point, they cannot use an absorption format as it does not provide the different needed categories within the income statement.

With the intern utilizing the absorption income statement format, it makes me feel as though she may not know exactly what she is doing. “With absorption costing, gross profit is derived by subtracting cost of goods sold from sales” while with variable costing, “all variable costs are subtracted from sales to arrive at the contribution margin” (Walther, 2019). This will allow the management team to have a better ability to decide their break-even point for the business.

Answer 1

The response is given below:

1. In the absorption cost the product cost and the revenue cost should match with each other, so that the whole income statement would be presented to analyse the financial activities in the organization.

2. Break even point focus towards a point where the total cost and sales will meet, but through absorption format it is difficult to find because the statement provided with not be for the whole business operation as where absorption would be a part analysis of finance.

3. When the management decide to find the break even point, from the absorption statement the cost utilized can be minus towards sales, so that helps to derive on the profit of the organization and ensure the organization to forecast the future needs and wants of financial planning.