Accountants prefer the variable costing method over 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

Accountants prefer the variable costing method over absorption costing method for evaluating the performance of a company because, in the absorption costing method, income could appear to be higher by producing more inventory. This is because fixed manufacturing overhead costs are included in the unit cost of the product, and producing more inventory will spread these costs over more units, making the unit cost lower and the reported income higher. The variable costing method, on the other hand, only includes variable costs in the unit cost of the product, and fixed manufacturing overhead costs are treated as a period cost and expensed in the period they were incurred, regardless of how much inventory was produced. This makes the variable costing method more reliable for performance evaluation purposes.

Accountants Prefer the Variable Costing Method Over Absorption Costing Method