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In: Business and Management

Submitted By kellykelly
Words 334
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The net realizable value method. The NRV method allocates joint costs on the basis of the final sales value less separable costs. Plus

the final sales value is simply the price tag. That price tag is paid by the customer. That price is paid after all production costs, whether

they are joint costs or separable costs incurred after splitoff.

The NRV method also does a good job of matching the benefit received (final sales value) with the costs incurred (separable costs).

The calculation happens at the end of all production. Contrast that with sales value at splitoff. The difference is a matter of timing.

From what I am understanding variable and absorption are two different costing methods. Practically all successful companies in the

world use both the methods. Variable costing and absorption costing cannot be substituted for one another because both the systems

have their own benefits and limitations. These costing approaches are known by various names. For example, variable costing is also

known as direct costing or marginal costing and absorption costing is also known as full costing or traditional costing (2015).

From my understanding the variable costing method is mostly used by internal management for decision making purposes. Absorption

costing provides information that is used by internal management as well as by external parties like creditors, government agencies and auditors etc. (2015).

When making strategic managerial decisions I would chose to use variable costing. One reason is because, variable costing does not

take into account fixed or absorption costs; therefore profits are likely to increase by the amount earned through the sale of the

additional item. Variable costing is referred to as direct costing, whereas absorption costing is known as full costing and allocates all

manufacturing costs to products (Schneider, 2012). Schneider (2012) defines “variable costing as an approach to product costing that

assigns only variable manufacturing costs to items produced” (Schneider, 2012).

Schneider, A. (2012). Managerial accounting: Decision making for the service and manufacturing sectors. San Diego, CA: Bridgepoint Education.

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