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Reply of at least 250 words . For each thread, you should support your assertions with at least 2 citations other than the textbook, and the Bible may be one of those sources. Everything must be in APA format.

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Jenifer,

Question Number Four: Absorption Costing

Part one

Part one of question number four asks us to explain how it is possible to increase net operating income without increasing sales when using the absorption costing method.  Simply stated, it is possible because absorption costing allows for some expenses to be deferred for one or more accounting periods.  Since net income is sales minus expenses (net income = sales – expenses), deferring or reducing expenses will increase net income even without sales increasing.   

Garrison, Noreen, and Brewer (2015) describe the absorption costing method this way, “Absorption costing is a costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in unit product costs.” (p234)  The authors further explain that, “For financial accounting purposes, product costs include all costs involved in acquiring or making a product.” (Garrison, Noreen, & Brewer, 2015, p.31)  Since fixed manufacturing overhead costs are treated as product costs, at the end of the reporting period, the portion of these costs assigned to unsold product will remain in an inventory account until the period when the product is sold.  It is at that point that the costs will finally be assigned to the cost of goods sold account and recognized in the income statement.  This delay in recognizing the expenses is due to the matching principle, which “requires expenses to be reported in the same accounting period as the sales they helped produce.”  (Wild, Shaw, & Chiappetta, 2011, p. 364)

Garrison, Noreen, and Brewer tell us that U.S. GAAP require absorption costing for external financial reporting and taxes, and that it is also the most common approach to product costing in the world. 

  Part Two

The second part of question number four asks us to consider the ethics of absorption costing.  As with most ethical dilemmas, I believe the answer really comes down to intent.  What are the motives of the decision makers.  It is entirely possible for a management team to manipulate earnings by producing extra inventory they do not intend to sell, just to reduce expenses and boost net income.  This surplus inventory could be held for several accounting periods, until such time as expenses could be cut, or the extra inventory could be reduced gradually over a number of periods as it became obsolete.  Although, this would be legal, it would not be ethical.   

As Christians, we should remember that God knows our hearts and our intentions.  And, we should seek his help in choosing to be ethical in all our business decisions.  1 Chronicles 28:9 says “And thou, Solomon my son, know thou the God of thy father, and serve him with a perfect heart and with a willing mind: for the Lord searcheth all hearts, and understandeth all the imaginations of the thoughts; if thou seek him, he will found of thee; but if thou forsake him, he will cast thee off for ever. (KJV)

References

Garrison, R., Noreen, E, and Brewer, P. (2015). Managerial Accounting (15th ed.). New York: McGraw-Hill/Irwin.

Wild, J., Shaw, K., Chiappetta, B. (2011). Fundamental Accounting principles, (20th ed.) New York: McGraw-Hill/Irwin