Question

How important is it to trace costs appropriately? Explain. As you are beginning to think about the importance of tracing costs appropriately, please consider the differences between variable costing and absorption costing. What implications does each of these have on such things as financial reporting of profit and pricing your products for the marketplace?

Answer 1

Answer:

Cost tracing is important because it helps a firm to make wise decisions.

Explanation:

Cost tracing can be defined as the process of matching a cost directly with a product being produced.

Variable cost that are accompanied with inventory are direct materials, direct labour and variable manufacturing overheard. the variable manufacturing overheard flunctuates based on amount of production. example is cost of electricity and gas.

Variable costing can also be used in determining cost-volume-profit relationships. This cost-volume-profit analysis aids managers in comprehending the minimum amount of inventory they need to produce to break even on their cost.

Variable costing can also be used in valuing inventory which makes it easier to compare the profitability of a product.

Absorption costing on the other hand, is advantageous for a small business because it complies with GAAP ( Generally Accepted Accounting Principle).

Absorption costing systems are easy to setup and less complicated than other costing systems. but the drawback of absorption costing is the way they handle fixed overheard cost.