Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 1

What are the advantages of the contribution margin format based on variable costing compared to the traditional format based on full absorption costing?

Step 1 of 2

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Variable costing

Variable costing is called direct costing and it helps management to take decisions. According to variable costing concept, the cost of goods manufactured includes only variable manufacturing costs which also changes with the changes in the production volumes. Fixed cost is treated as an expense for the period when fixed cost is actually incurred and same is not included or added for the purpose to calculate cost of goods manufactured.

Absorption costing

According to absorption costing concept, all manufacturing costs like direct material, cost direct labor cost, variable factory overhead cost, fixed factory overhead cost etc. are added in finished goods and unsold finished goods stock is treated as an asset. It helps to calculate historical costs which is needed for financial reporting to external users.