Accountants prefer the variable costing method over the absorption costing method for evaluating the performance of a company because
A)by using the absorption costing method, income could appear to be higher by producing more inventory.
B)by using the absorption costing method, income could appear to be lower by producing more inventory.
C)by using the variable costing method, the cost of goods sold will be higher as more units are manufactured and sales remain the same.
D)by using the variable costing method, all fixed and variable costs are included in the unit cost of the product manufactured.

Question

Quizplus · Accepted Answer

Under the absorption costing method, producing more inventory can increase the reported income because fixed manufacturing overhead costs are distributed across more units, reducing the cost per unit and thus increasing the margin on units sold. This can make performance appear better than it actually is, which is why accountants may prefer variable costing for internal decision-making, as it does not allocate fixed manufacturing overhead to the cost of each unit produced.

Accountants Prefer the Variable Costing Method Over the Absorption Costing