Variable Costing System A Decision Making Tool for Management:
After studying this chapter you should be able to:
Explain how variable costing differs from absorption costing and compute unit product costs under each method
Prepare income statements using variable and absorption costing.
Reconcile variable and absorption costing net operating income and explain why two amounts differ.
Understand the advantages and disadvantages of both variable and absorption costing.
Two general approaches are used for valuing inventories and cost of goods sold. One approach is called variable costing and other is called absorption costing. Absorption costing is generally used for external financial reports and variable costing is preferred by managers for internal decision making and must be used when an income statement is prepared in the contribution margin format. Ordinarily these two costing systems produce different figures for net operating income and difference can be quite large. The reason of this difference is well explained on the following pages. Click on a link for detailed study.