Variable Costing

Better Essays
VARIABLE COSTINGMorenike Onibon
Liberty University
Abstract
Determining the actual valuation of manufactured assets has always been a major problem in the accounting field. The real controversy exist in the decision regarding which costs are relevant to future periods, and thus should be included in assets valuation, and which should not be charged against net income. An understanding of the relationship between costs, volume, and profit, enables management to set more realistic objectives for the future, and to make decisions with greater assurance that those objectives will be met. The type of information needed to make useful decisions is not provided by the periodic manufacturing costs and income statement which are generally used because they do not make a difference between those costs that are fixed, and those that are variable. As a result, management became obligated to rely on the alternative variable costing method which provides better information for managerial accounting purposes. Although it is not allowed for external reporting, the variable costing method is preferred by managers because it generates great tools for internal decision making purposes CITATION Nat76 \l 1033 (Accountants, 1976).
Introduction
Accounting, the art of recording, analyzing, summarizing, and reporting financial transactions can be divided into two distinct categories: managerial and financial accounting. Contrarily to financial accounting which is a tool used to communicate a company’s financial health to shareholders, managerial accounting is primarily concerned with helping internal users make the best decisions. Many costing tools such as job order costing, process costing, absorption costing, variable costing, or even cost volume profit analysis are used to guide managers in making companies more profitable. The most important of them all, variable costing, is a managerial costing approach that was specifically intended to be used only internally due to its many



References: BIBLIOGRAPHY Accountants, N. A. (1976). Direct Costing. Michigan: The University of Michigan. Chandra, G. (1976). Direct Costing vs Absorption Costing: A Historical Review. The Academy of Accounting Historians, 2. Ray H. Garrison, E. W. (2015). Managerial Accounting. New York: McGraw Hill Education. Sciff, M. (1987). Variable Costing: A Closer Look. Management Accounting, 36. Web Finance, I. (2014). Business Dictionary.com. Retrieved from Absorption Costing: http://www.businessdictionary.com/definition/absorption-costing.html

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Absorption Costing and Variable Costing Methods—Benefits Management considers fixed and variable costs to calculate product cost under the absorption costing method. Moreover, businesses use absorption costing (for reporting purposes) to adhere to (GAAP) generally accepted accounting principles (Kimmel, Weygandt, & Kieso, 2011). In contrast to absorption costing, management considers fixed costs as period costs (rather than product costs) in variable costing. As a result, product costs refers to…

    • 101 Words
    • 1 Page
    Satisfactory Essays
  • Powerful Essays

    AND VARIABLE COSTING Learning Objectives 1. Explain the accounting treatment of fixed manufacturing overhead under absorption and variable costing. 2. Prepare an income statement under absorption costing. 3. Prepare an income statement under variable costing. 4. Reconcile reported income under absorption and variable costing. 5. Explain the implications of absorption and variable costing for cost-volume-profit analysis. 6. Evaluate absorption and variable costing.…

    • 787 Words
    • 4 Pages
    Powerful Essays
  • Satisfactory Essays

    When will profits reported under variable and absorption costing differ? How can we reconcile the profits reported under the two approaches? Profits reported under variable and absorption costing will differ when inventory increases or decreases during the year. The difference involves the timing with which fixed manufacturing overhead becomes an expense. Under variable costing, fixed overhead is expensed immediately as it is incurred. Under absorption costing, fixed overhead is inventoried until…

    • 590 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Variable costing and absorption costing are the two most commonly used methods of inventory costing for manufacturing companies. The inventory method of variable costing takes place when total direct and indirect variable manufacturing costs are included within inventoriable costs. Fixed manufacturing costs however, are considered costs of the period under variable costing. The next method of inventory costing, absorption costing, includes all variable manufacturing costs as well as fixed manufacturing…

    • 598 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    ADVANCED MANAGEMENT ACCOUNTING QUESTIONS Marginal Costing Vs. Absorption Costing 1. During the current period, ABC Ltd sold 60,000 units of product at Rs. 30 per unit. At the beginning for the period, there were 10,000 units in inventory and ABC Ltd manufactured 50,000 units during the period. The manufacturing costs and selling and administrative expenses were as follows: Total cost Rs. Beginning inventory: Direct materials Direct labour Variable factory overhead Fixed factory overhead Total Current…

    • 13975 Words
    • 56 Pages
    Good Essays
  • Good Essays

    Absorption and Variable Costing, Inventory Management Absorption and Variable costing are very important tools for cost accounting. Both of these costing methods allow you to see the cost of your inventory, in a different way. For example the absorption method allows you to assign all costs to the product, while variable costing allows only variable costs to be assigned to the product. Inventory management is extremely important as well because it ties into efficiency and lowering your costs…

    • 1600 Words
    • 7 Pages
    Good Essays
  • Powerful Essays

    Chapter 7 Notes Page 1 Variable Costing Absorption As we have seen in previous chapters, when you manufacture your own inventory, the cost of that inventory includes all of the costs associated with running the factory that produces the inventory. Generally, no part of the factory cost is expensed. Instead, it is capitalized as the cost of the inventory produced. It is only expensed when the inventory is sold. At that point the cost of the inventory becomes Cost of Goods Sold. This system is…

    • 3138 Words
    • 23 Pages
    Powerful Essays
  • Satisfactory Essays

    Absorption Costing vs. Variable (Direct) Costing Absorption cost systems are widely used to prepare financial accounts. These systems are designed to absorb all production costs (variable or fixed) into costs of units produced. Absorption costs techniques allow manufacturing costs to be traced and allocated into product costs. There are different types of absorption costing systems: job order costing, process costing, and ABC costing. In job order costing, costs are assigned to products in batches…

    • 779 Words
    • 4 Pages
    Satisfactory Essays
  • Powerful Essays

    variable costing sm7 libre

    • 8831 Words
    • 74 Pages

    Chapter 7 Variable Costing: A Tool for Management Solutions to Questions 7-1 The basic difference between absorption and variable costing is due to the handling of fixed manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a product cost and hence is an asset until products are sold. Under variable costing, fixed manufacturing overhead is treated as a period cost and is charged in full against the current period’s income. 7-2 Selling and administrative expenses…

    • 8831 Words
    • 74 Pages
    Powerful Essays
  • Good Essays

    Advantages and disadvantages of variable costing Many managers use variable costing for internal reporting and decision making since it has number of advantages (Myers par. 1). First, on variable costing reports costs are organized by behavior which makes it easier to understand. Also, variable costing statements facilitate cost volume profit (CVP) analysis because it separates cost behavior by fixed and variable. Under variable costing, changes in inventory or production do not affect the…

    • 409 Words
    • 2 Pages
    Good Essays