Allpro Clubs is a start-up company that manufactures golf clubs. The owner of th

Question

Allpro Clubs is a start-up company that manufactures golf clubs. The owner of the company is upset because Allpro has reported losses for the last three quarters, despite increased production and the acquisition of new customers. The owner is worried about his ability to obtain additional financing. In reviewing the operating performance of Allpro, you notice that the company's income statement has been prepared using variable costing. You know that although the company is not required to use GAAP, the absorption costing method may be a beter method for Allpro to useor fnancial reporting purposes. As the senior accountant, draft a memo to the owner explaining the diferences between variable and absorption costing and how a change in methodology could impact the company's profitability. REMINDER: Your response will be graded for both technical content and writing skills. Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organization, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation. Memorandum To: Subject Allpro Clubs Owner Absorption vs. Variable Costing

Explanation / Answer

   Memorandum

To:    Alpro Clubs Owner

Subject: Absorption Costing

Dear Sir,

I would like to bring to your notice that despite an increased customer base and production, Alpro Club has been reporting losses. The primary difference for this is the method used of costing used by the company. The company uses variable costing for the purpose of financial reporting. I feel that absorption costing will provide a more accurate measure of the company's profitability.

   The primary difference between these two methods is the difference in the treatment of fixed manufacturing overheads. Under variable costing method, fixed manufacturing OHs are expensed in the period in which they are incurred. They are not incorporated in the cost of the product. However, in absorption costing, the fixed manufacturing overheads are expensed when the product is sold.

If the company chooses to use absorption costing, it will be ensured that there shall be adequate revenue to cover the cost of goods sold as the fixed manufacturing overheads will only reflect on the income statement when the product is sold. I request you to consider the more appropriate method of costing.

Yours sincerely,

XYZ

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.