Criticism of Absorption Cost System Math Problem

Criticism of intentness Cost System - Math Problem ExampleAs common sense would eat it, glacial cost remains get downed no matter what the aim of production is. Hence, in such a case managers often tend to everywhere produce thinking its better to every(prenominal)ocate the fix everywherehead over a wider range of output and reducing the cost per unit (since spreading located cost over greater units tends to drive down frozen cost per unit and when stock-still be per unit go down indeed so does the overall costa per unit), thus seeking an affix in profit per unit of output. The lower fixed cost per unit does of course increase the level of profitability. But a couple of factors direct to be considered while making the overproduction decision. While over producing tends to allocate fixed cost over a greater units of output, we demand to see whether we really need to over produce. Many factors would need to be considered including the demand for the excess produce, stor age and handling costs, cash accrue situation etc. There would be no point going for over production if on that point is no sales market for additional units or the storage costs are high as such a step might actually cost more than the saving through by allocating the fixed overheads on excessive production. It also needs to be considered that what would happen to the excess origin that would be produced. If the participation has not taken care of the market conditions and consequently it produces in excess of its projected sales, then such an exercise would result in excessive stock piling. Clearly the company wouldnt be profitable in such a scenario. Another key question that needs to be answered is whether the fillip to raise allows over producing stock irrespective of stock piling or storage conditions. The excessive inventory that would be produced would be visible to everyone, reflected on managerial accounts as well as in the companys audited financial statements. It is no doubt important for managers and decision makers to consider here whether the allocation of fixed overheads provides an incentive to overproduce or not. However the danger reflected by the incentive to over produce should not be made the basis of decision making about the allocation of the fixed overheads. I checker with your view that over production results in excess inventory. Yes, sometimes it does happen that excessive production is done at the year-end so that the production costs can be driven down and financial statements are efficiently window dressed to show a good position of the company. However you need to know that there are some products that take a lot of time to be produced and their fixed costs are extremely high. In such a case, I personally think that over production is justified provided there are adequate storage facilities and there is an active sales market. scholarly persons Response In my experience allocations which are confined to fix overhead is the catalyst to overproduce a less(prenominal) than desirable product. There are two things that definitely go wrong. 1. When management have an incentive to decrease the cost of product, usually this is a force step toward decrease quality of all resource used to make a final product with less capital and in less time.