Draft of Inventory management and cost accounting

High School ・Accounting ・APA ・2 Sources

The absorption cost is the best cost to ensure optimal cost allocation. The absorption cost is used in inventory costing and comprise of all variable manufacturing cost in addition to the total fixed manufacturing cost and presented as inventory costs. The inventory absorbs the total manufacturing cost. Therefore, to show the statement of absorption costing, the variable and fixed cost does not have to be separated. The operating income is $265,525 and under the absorption costing it is $211,525 hence it is 54,000 lesser. This is due to the cost of fixed manufacturing being $162,000 in the absorption costing. In the case of variable costing, $216,000 is inputed in the fixed manufacturing expenses.
During an accounting period if inventory increases, the variable costing will record a less operating income compared to the absorption cost.in the case when the inventory reduces the operating income increase and recorded under variable cost than being recorded in the absorption cost. The difference of the reported is specifically due to: transferring the fixed manufacturing cost to inventory as inventory grows. Transferring the fixed manufacturing costs from inventories due to decrease in inventories under the absorption cost.
The method above can be very effective in ensuring that decision makers accomplish their achievement in the following ways:
• The method is cost effective hence managers can only utilize one inclusive method of inventory costing in computing the internal and external reporting in the performance evaluation.
• It can curb issues that the company faces when the managers use methods that look appealing yet they hurt the company’s income when reporting to by the shareholders.
• It sums all the costs of manufacturing costs regardless of being a fixed or variable cost of production. The inventory costing method is a very common method used by various companies in the long-run decision making. Example of common long term decisions are pricing and mixing of products. These long-term decisions have to involve both the fixed and variable costs.
• The absorption costs is known for its nature of allowing managers to enlarge the margin of in the operating income by producing a more in demand stock the managers can also produce for inventory if they want to increase the company’s growth or want additional storage for anticipated demand in the future.in the absorption costing some managers could be tempted to produce more even though the demand is not expected to be high in the future. The main cause of this practice by managers can be attributed to two factors. First, the manager could benefit by getting a large bonus, as the higher the operating income the higher the bonus for the manager. Secondly, the stock prices could be positively affected by the higher level of income, therefore, the manager will appear to be very valuable to the success of the company.
Pros and cons of Inventory management
• Faster inventory turnover, the company may increase inventory turnovers as much as they want and decrease inventory costs by 10% TO 40 %
• Enhances customer care services, the company can increase the fill rates to up to 80% and 90%,this can be facilitated by providing the right service or product at the right time ensuring customer satisfaction is reached.
• There are lesser audits and few inaccuracies in the inventory. This can be developed to over 90%redcing the need for lesser audits of the inventory.
• Lesser set up times, this can be condensed by 25% to 80% by warranting coordination and grouping together of similar jobs.
• The quality of work is enhanced, accuracy is enhanced and production efficiency guaranteed.
• Improved cash flow and revenue is collected on time, manufactures are given the power to examine receivables before issues come up rather than just reacting.
• Challenging to implement, this can be as a result of incorporation of new software.
• The high cost of customization in order to accommodate the various processes in the business.
• The high cost involved in training employees in the inventory management.
• Consequences which were not expected, factors such as resistance to change by employees present severe challenges to the business.
• The level of analytics could be feebler and the operations decisions could be excessive.
This is the process of comparing a company or individual performance with those of recognized leaders in order to determine the best practices that will ensure superior performance when incorporated.
Advantages of benchmarking
• Benchmarking lowers the labor costs
• It improves the quality of production in the company
• Increases the level of sales hence ensuring high profitability
Types of approaches to benchmarking
• Internal benchmarking: this is carried out between teams, individuals or groups within the organization.
• External Benchmarking: this is comparison with other peer organization or all across industries
Benchmarking can further be divided into:
• Process benchmarking:
• Performance metrics
• Strategic benchmarking
Management is very much interested in measuring the level of performance. They need to utilize a strategy that will increase the performance of the business. They are divided into whether to focus on product differentiation or to go with cost leadership. The cost volume profit is very important for managers in making short term decisions it utilizes the concept of fixed costs, variable costs and the sales price. The company has indicated a difference in these hence it should utilize the most economically viable. The company should also undergo benchmarking to be in a better position to decide the next step of the two choices. Benchmarking will enlighten the company on the best cost effective and management steps compared both internally and externally.


Hamlet, K.(2017).Methods for Inventory Control. Retrieved on 14th August from http://smallbusiness.chron.com/methods-inventory-control-2234.html
Watson, G. H. (1992). The Benchmarking Workbook: Adapting Best Practices for Performance Improvement. Portland, Ore.: Productivity Press.

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