1. It eliminates time-consuming and argumentative fixed overhead allocations. - Partially true. Absorption costing statements would need to be prepared annually or quarterly for shareholder reporting and income tax calculations. Departmental predetermined overhead rates would not need to be developed as part of the process of preparing the standard cost sheet of each product.
2. Improved cost control. - Partially true. A clear segregation of fixed and variable costs aids in cost control; variable costs are controlled on a unit-of-product-basis. But absorption costing does not preclude this kind of analysis. The primary advantage that variable costing provides is the elimination of overhead volume variance.
3. Contribution margin data is a better indicator of profitability than gross margin data. - Partially true. If the allocations of fixed costs are equitable, then product 129 is causing more fixed costs to be incurred per dollar of sales [($2.54 - $1.38) / $4.34 = 26.7%]than product 243 [($3.05 - $2.37) / $5.89 = 11.5%]. FIxed costs may be sunk costs in the short term, in the longer run they are not. Thus in terms of profitability, time must be a consideration.
4. Marketing will underprice products if variable costing is used - False. Variable costing is useful for some decision, while full cost data is useful for others.
5. Lack of control over long-run costs can bankrupt a company - False. While the statement is generally true, it is immaterial with the proposal. if the company introduces variable costing, thus allowing for the routine separation of fixed and variable costs, then overall control may be enhanced as stipulated by the controller.
6. Lower profits will be worrisome to shareholders and banker - False. Variable is not permitted under GAAP or income tax regulations.
Companies should consider designing their accounting structure to facilitate the segregation of fixed costs from variable costs. These cost data