Venlite,Inc.produces and sells cosmetic products.Currently,the company is operating at 70% of its capacity.The sales price of its product is $30 per unit,and it incurs a full cost of $25 to produce each unit.Its yearly fixed manufacturing overhead amounts to $20,000.The company has received a one-time order for supplying 5,000 units at $26 per unit.This order can be executed within the excess production capacity and will not involve any additional costs.To make this decision,the management of Venlite should use ________.

Question

Quizplus · Accepted Answer

The management should use variable costing as the decision is short-term in nature. Variable costing only includes variable costs such as direct materials, direct labor, and variable manufacturing overhead in product cost, and fixed costs are treated as period expenses. Since the one-time order can be executed within the excess production capacity and will not involve any additional fixed costs, variable costing will provide a more accurate picture of the profitability of the order. Using absorption costing, which includes fixed manufacturing overhead in product cost, may give a distorted view of the profitability of the order.