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Variable Costing

In: Business and Management

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Chapter 12
Variable Costing
(Direct Costing) is a method of recording and reporting costs which regards only the variable manufacturing costs as product costs. Fixed manufacturing costs are written off as period costs.
It includes only variable production costs in product costs. DM, DL and VMO costs would ordinarily be included in product costs under variable costing. FMO is not treated as a product cost under this method.
Underlying Concept: * Proponents of this product costing method maintain that the fixed part of factory overhead is more closely related to the capacity to produce than to the production of the specific units and therefore should be charged off as expense in the period incurred.

* Variable Costing is for Managerial decision making purposes.

* Not acceptable for financial reporting or tax purposes.

* Absorption Costing is for external reporting purposes.

* Not intended to discourage to the use of Variable Costing for internal management purposes.
Advantages of Using Variable Costing
It meets the THREE OBJECTIVES of management control system; * By showing separately those costs that can be traced to;

* Controlled by each strategic business unit (SBU);

* Net income using variable costing is not affected by changes in inventory levels because all fixed costs are deducted from income in the period which they occur.
Disadvantages of Using Variable Costing 1) Variable costing may encourage a shortsighted approach to profit planning at the expense of the long-run situation. 2) Variable costing tends to give the impression that variable costs are recovered first, the fixed costs are recovered later and that finally profits are realized. 3) Variable costing is not acceptable for external reporting and tax purposes.
Absorption Costing
(Full, traditional, conventional and normal costing) is a…...

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