Profits move in the same direction as sales when variable costing is used if selling prices, the sales mix, and the cost structure remain the same

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When using variable costing, profits move in the same direction as sales as long as the selling prices, sales mix, and cost structure stay constant. This is because variable costing only considers variable costs as expenses, which change directly with changes in sales. This method can provide a clearer picture of the contribution margin and the product's profitability.

As for absorption costing, this method allocates both variable and fixed costs to the product, resulting in higher profits when production exceeds sales and vice versa. This method can also provide a more accurate picture of the production's total cost but may be less useful for decision-making purposes.

However, both methods have limitations. Variable costing may create confusion when overhead costs are not explicitly identified, and it may not reflect the total production cost accurately. Absorption costing, on the other hand, may incentivize increased production since fixed costs are spread out over more units, potentially leading to inaccuracies in profitability forecasts.

Profits Move in the Same Direction as Sales When Variable