Question

1. Do you thing that variable costing is useful for controlling company costs? Defend your response with examples.

2. Explain why variable costing and absorption costing can result in different period incomes. Support your argument by an example which spans more than one accounting period.

(Please provide examples with detailed explanation)

Answer 1

Answer 1 - Variable cost change with activity or production volume. Hence the variable cost is directly linked with the levels of production/working done by the company, as variable cost increases/ decreases as level of activity changes and doesnot incurr if no activity is performed.

For example, if a manager is deciding between keeping production levels constant or increasing production, the primary factors in this decision will be the variable or incremental costs of the production of additional units of output.

Hence Variable cost is useful for controlling comapny cost.

The basic examples of variable cost is direct material direct labour cost. Other than that if a telephone company charges a per-minute rate, then that would be a variable cost. A twenty minute phone call would cost more than a ten minute phone call

Answer 2 - Variable costing and absorption costing are two different methods to allocate cost to products and services.The difference between two is treatment of fixed manufacturing overhead cost.

Under variable costing system the fixed manufacturing overhead are expensed in the period in which they are incurred.Whereas in absorption costing method the fixed manufacturing overhead are expensed in the period in which the product is sold.

Example of variable and absorption costing is attached below -