Why do companies use variable costing for internal financial statements?
A) Production volume variance does not affect variable costing income but it does affect absorption costing income.
B) Variable costing does not create an incentive to produce additional unneeded units to increase net income.
C) A sales-oriented company wants to track the effect of sales on net income.
D) All of the above

Question

Quizplus · Accepted Answer

A) Production volume variance does not affect variable costing income but it does affect absorption costing income - this is a benefit of using variable costing for internal financial statements because it allows management to clearly see the impact of changes in production volumes on net income.
B) Variable costing does not create an incentive to produce additional unneeded units to increase net income - this is also a benefit of using variable costing as it encourages management to focus on efficiency rather than simply increasing production for the sake of boosting net income.
C) A sales-oriented company wants to track the effect of sales on net income - this is another benefit of using variable costing for internal financial statements as it allows management to easily see how changes in sales levels impact net income.

Why Do Companies Use Variable Costing for Internal Financial Statements