Question

Variable costing is often suggested as a solution to the incentive to overproduce inherent in absorption costing. How does variable costing differ from absorption costing? What are the advantages of variable costing? What are the potential problems with variable costing?

Answer 1

Answer:

Variable costing:

This is a technique accounting to distinguish variable cost in an manufacturing part. Variable expenses are direct material cost, direct labor cost, direct costs, and variable manufacturing overhead. Any kind of fixed expense ought not be considered here. Expecting fixed expenses are period costs.

Absorption costing:

This is likewise a technique for accounting of an manufacturing part. In any case, in this technique both variable and fixed manufacturing expenses are considered.

The contrast between the two costing methods:

Completion stock under variable costing technique depends on variable manufacturing costs. In any case, under absorption costing strategy, it depends on both variable and fixed production costs.

In the event that stock builds a portion of fixed manufacturing overhead will be conceded under absorption costing. Yet, there is no such delay under the variable costing strategy. In this manner, the net working income in absorption costing would be higher than variable costing.

Advantages of Variable costing :

• Net working income would be changed proportionately with the adjustment under production units, since the fixed expenses are isolated and right now allocated. Such relative change is beyond the realm of imagination in absorption costing strategy.
• Provides vital data for cost volume benefit (CVP) analysis. This information can't be straightforwardly received from a conventional income statement arranged under absorption costing framework.

Dis Advantages of Variable costing :

• Variable costing doesn't allocate fixed expense to units of items. So the manufacturing costs can't be genuinely coordinated with incomes.
• Fiscal reports prepared under variable costing technique don't fit in with GAAP..
• This framework isn't perceived or allowed by tax authorities like IRS in the US.