Many companies have switched from absorption costing to variable costing for internal reporting ________.
A) to comply with external reporting requirements as required by GAAP
B) to increase bonuses for managers
C) to reduce the undesirable incentive to build up inventories that would show higher operating income
D) so the denominator level is more accurate

Question

Quizplus · Accepted Answer

Absorption costing includes fixed manufacturing overhead costs in the cost of goods sold, which creates an incentive for managers to increase production and build up inventory in order to decrease the per unit fixed manufacturing overhead cost and increase reported operating income. Variable costing, on the other hand, only includes variable manufacturing costs in the cost of goods sold, which eliminates this incentive and provides a more accurate reflection of the company's true costs of production. Therefore, many companies have switched from absorption costing to variable costing for internal reporting to reduce this undesirable incentive.

Many Companies Have Switched from Absorption Costing to Variable Costing