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).
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