"Principles of Accounting, Volume 2: Managerial Accounting: 6.5 Compare and Contrast Variable and Absorption Costing. Advantages And Disadvantages Of Cost Accounting, Presentation on Expenditures Processes and Controls Purchases, Reasons for difference in Profit or Loss between Cost and Financial Account, Discuss Different Form of Letter of Credit. Variable costing always produces an increase in income corresponding to the improved sales performance. Content Filtrations 6. Variable costing is not allowed under GAAP as it does not account for fixed manufacturing overhead costs. However, such is useful for internal users as fixed manufacturing overhead is charged as an expense within the current period to not overstate net income. The manufacturer recently received a special order for 1,000,000 phone cases at a total cost of $400,000. Plagiarism Prevention 4. It cannot be true under all circumstances. - Definition & History, What is a Network Protocol? While companies can use this reporting method, auditors may challenge the use of variable costing. They have no control, however, over insurance costs related to the production department building. Due to ample capacity, the company will incur no additional fixed costs to produce the special order of 1,000,000. Variable costing and absorption costing cannot be substituted for one another because both the systems have their own benefits and limitations. Income figures obtained under variable costing have to be use a carefully if management decides to expand business or drop a product line. You may use it as a guide or sample for Morse, Davis and Haitgraves observe: when considering the financial accounting principle of matching, variable costing has advantage over absorption costing because it matches revenue with the direct cost of producing those revenues. This essay was written by a fellow student. Gross Profit vs. Net Income: What's the Difference? writing your own paper, but remember to Similarly, under variable costing, each other variable and fixed operating expenses (e.g., variable and fixed selling and administrative expenses) are reported separately and thus become easier to identify and control than in absorption costing where they are not reported separately but combined together. Advantages. Variable costing provides a better understanding of the effect of fixed costs on the net profits because total fixed cost for the period is shown on the income statement. Various methods of controlling costs such as standard costing system and flexible budgets have close relation with the variable costing system. Let's imagine you own a hair salon that specializes in hair coloring. The impact of absorption costing will depend on the business. More accurate product costing, more effective cost control, and better focus on the relevant factors for decision making. An error occurred trying to load this video. Managerial accountants report this information to owners and managers who use the data to make decisions. I feel like its a lifeline. As more products are provided, more supplies are needed and more costs It is argued that managerial decisions can be easily made if fixed production costs are separated and are not mixed in inventory or cost of sales. Despite the many, other advantages of the method for internal purposes, variable costing generates product figures providing little basis for long range pricing policies. Learn about this method in accounting, understand the formula for determining variable cost, and explore its advantages and some examples. A higher price will decrease the sales revenue; a lower price tends to increase the sales volume and leads to abnormal production costs due to overtime, production inefficiencies, etc. Furthermore, the variable costing can be used to evaluate the profit contributions of plants, product lines and sales territories. Tara received her MBA from Adams State University and is currently working on her DBA from California Southern University. Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of providing its services. - Profit resulting from inventory buildup, not sales, is ignored. As previously stated, there are three parts of the business cycle: production, distribution, and sales or consumption, specifical sales to consumers. - Types & List, Mousetrapping in Computer Security: Definition, What is a Ransomware Attack? 281 lessons, {{courseNav.course.topics.length}} chapters | Inventory changes do not affect profit. The identification and classification of costs as either fixed or variable, with semi-variable expenses properly subdivided into this fixed and variable components, provide useful framework for the accumulation and analysis of costs and further for making decisions. What is the Difference Between Phishing and Pharming? Variable costing will result in a lower breakeven price per unit using Adding new products or expanding current production levels also relies on this consistent information. The product is created from the expectation of the customer and, hence, the cost is also based on similar lines. WebAdvantages of variable costing income statement are discussed and provide below- Helps in cost management and cost planning: Variable costing income statement helps the Which is better absorption or variable costing? Absorption costing involves allocating all of the direct costs associated with manufacturing a product to COGS. Variable costing, through its emphasis on cost behaviours, provides that necessary information. Choose skilled expert on your subject and get original paper with free plagiarism These costs have an amount that continues to change according to the volume of business activities. Thus a financial plan will highlight expected production level and related expected costs. Fixed production costs are charged to the period in which they are incurred and are not carried forward in stock which may be un-saleable, resulting in earlier profits being overstated. If the implementation of the two methods is still too complex, you can use the Accounting System from HashMicro. WebThe advantages of the variable costing Variable costing provides management with data on variable costs and contribution margins needed to make daily decisions on special orders, capacity expansion, and production shutdown. Businesses use two basic costing approaches variable costing and full costing. What is variable costing also known as? Generally Accepted Accounting Principles (GAAP) has no preference as to how variable fixed costs are handled in a companys production process. In some cases, a sales order can be accepted even if it contributes partly to fixed costs. Variable Costing Disadvantages and Advantages Variable costing may provide a clearer picture of the actual incremental costs associated with a specific When production goes down, fewer products and supplies are needed. When inventory levels fluctuate greatly, profits calculated under absorption costing may be distorted since inventory changes will influence the amount of fixed manufacturing overheads charged to an accounting period. As a result, the costs that the manufacturer will assign under full costing are as follows: The purpose of variable costing is to provide information for management in short-term decision making, namely: For most of you who may still confuse about choosing the suitable method for your business, the continuation of this article can add to your insight before making the appropriate choice. Plus, get practice tests, quizzes, and personalized coaching to help you In December, business jumped again. Why do businesses use absorption costing? It may prompt the marketing managers to go for lower selling prices, may inspire the managers and employees to demand higher salary or bonus. {{courseNav.course.mDynamicIntFields.lessonCount}} lessons Marginal income data facilitate appraisal of segments without the bias (cross-subsidies) introduced by allocated common fixed costs. But they are not all controllable at the same level of management. "@type": "FAQPage", The standard costing system and flexible budgets, among other cost-control strategies, are closely related to the variable costing system. Your sales in November and December were $8000 and $7200, respectively. Furthermore, it means that companies will likely show a lower gross profit margin. These allocations may not reflect accurate charging of manufacturing overhead to different production levels. Also read: COGS (Cost of Goods Sold) A Component in Business You Have to Know. Companies that use variable costing experience fewer cost changes from inventory adjustments. The price at which this volume can be achieved is the optimum product price. WebBoth costing methods have advantages and disadvantages. For example, a company has to pay its manufacturing property mortgage payments every month regardless of whether it produces 1,000 products or no products at all. Companies may decide that absorption costing alone is more efficient to use. All costs are controllable in the long run by someone within a business enterprise. us: [emailprotected]. Kirk Thomason began writing in 2011. Measurement of efficiency: Standard costs can be compared with actual costs. Phantom profits are ignored. When compared to variable costing, this results in a higher operating profit figure. Under variable costing, management has the data to determine when it is advisable to accept orders if other than normal conditions exist. The product is not complete until it is in a form and place and at a time desired by the customer, and this product completion involves distribution just as essentially as it does manufacturing. This service will require $10 in color and supplies. Complete product cost does not depend only on variable costs. As the companys cost accountant, the manager wants you to decide whether or not to accept this order. These costing approaches are known by various names. As more products are provided, more supplies are needed and more costs are incurred to create the products. For example, activities, their drivers, and their costs may be classified as order level, customer level, channel level, market level, or enterprise level. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area. Variable Costing Advantages & DisadvantagesAdvantage: Unaffected by Inventory Changes. Companies that use variable costing experience fewer cost changes from inventory adjustments. Advantage: Profitability Estimating. Estimating future profits is often easier with variable costing when compared to absorption costing.Disadvantage: Non-Conforming Method. Disadvantage: Lower Net Income. In turn, that results in a slightly higher gross profit margin compared to absorption costing. Both come with different advantages and some limitations to implement. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Most companies will use the absorption costing method if they have COGS. 's' : ''}}. It is rightly contented that the best or optimum price is that which produces the maximum excess of total sales revenue over total cost. Variable costs are expenses for items that are used in manufacturing that go up and down as a result of production and manufacturing going up and down. Variable costing reports are far more effective for management control than absorption costing reports because profit goals link with variable costing reports and can identify organizational responsibility. For instance, when sales are higher than production, variable costing net income will be more than absorption costing net income. { However, you also had an increase in revenue, bringing in $12,000 in sales. Both costing methods have advantages and disadvantages. The definitions of full costing and costing variables and their strengths and weaknesses are provided below, along with examples. Sales affect variable costing net income. - Definition, Detection & Security, Asymmetric Threat: Definition & Characteristics, IT Threat Mitigation: Definition & Strategies, Nanotechnology: Definition, Applications & Examples, Computer Animation: Definition, History & Types, Working Scholars Bringing Tuition-Free College to the Community. The management can find out contribution limit that is useful for determining the planned profit through the analysis of the cost-volume-profit relationship and for decisions for management in making short-term policies. Companies that use variable costing may be able to allocate high monthly direct, fixed costs to operating expenses. Variable costs are a simple way of understanding what happens to supplies and products that are used in the course of manufacturing and production. Variable costing produces net operating income that is typically close to cash flow. (2017, Mar 20). flashcard set{{course.flashcardSetCoun > 1 ? Assignment of revenues is also a critical concern in customer profitability analysis. Absorption vs. variable costing will only be a factor for companies that expense costs of goods sold (COGS) on their income statement. What are three advantages of activity-based costing over traditional volume-based allocation methods? Variable costing assigns the cost of materials and supplies as needed in the production process. If a company has high direct, fixed overhead costs it can make a big impact on the per unit price. Some of the direct costs associated with manufacturing a product include wages for workers physically manufacturing a product, the raw materials used in producing a product, and direct overhead costs involved in manufacturing a product. With variable costing, all of the variable direct costs are included in COGS. To simplify cost control, the manufacturer only considers variable manufacturing costs. Each of these methods has different applications and uses. Variable costing can also be termed as the direct costing and marginal Download now: HashMicros Accounting Software Pricing Scheme Calculation. As the sales and demand went down, the variable costs also decreased. Thus control is exercised by management through taking corrective actions. How Is Absorption Costing Treated Under GAAP? With absorption costing, profitability is obscured by Log in or sign up to add this lesson to a Custom Course. Variable costing can exclude some direct fixed costs. The biggest advantage is how easy it is to understand variable costs. Almost all successful companies in the world use both the methods. Expensing fixed production costs as a period expense lowers net income for each accounting period. As a member, you'll also get unlimited access to over 84,000 However, this does not occur with variable costing. Absorption costing reflects more fixed costs attributable to ending inventory. Create your account, 25 chapters | The reports based on variable costing are far more effective for management control than those based on absorption costing because; (a) Variable costing reports are related to profit objectives, (b) It can pinpoint responsibility according to organizational lines. In absorption costing, over production especially distorts net income during a period because the excess inventory is assigned fixed costs that would otherwise be assigned to the units produced and sold.. Another benefit of variable costing is that the favourable margin between selling prices and variable cost should provide a constant reminder of income forgone because of lack of sales volume. TOS 7. Absorption costing and variable costing are methods used to value companies' work in progress and inventory, for accounting purposes. Advantages of Absorption Costing and Variable Costing . Total = $305,000 / 1,000,000 units produced = $0.305 variable cost per case. The manufacturer only considers variable manufacturing costs to ease cost control. Fixed Costs and Variable Costs: Get to Know the Definition and the Examples! Segmented reporting provides information about the contribution of organizational subunits. A custom orders selling price includes the variable cost of production. This means companies will have a higher breakeven price on production per unit. Rice University, Open Stax. Contact us VIA WhatsApp for a faster response! Businesses use two types of costing methods: variable costing and full costing. requirements? Absorption Costing: Advantages and Disadvantages, How Fixed and Variable Costs Affect Gross Profit. Image Guidelines 5. Indirect costs are associated with the operating expenses of a company. Absorption costing shows less change in net profit when the companys production remains unchanged but sales fluctuate (Langholm 223). Variable costing is a particular method companies use to determine product cost. Variable costs of electricity used to run a plant in manufacturing mode, The mortgage payment on a building used for manufacturing, A mortgage payment on a building used for manufacturing, Variable manufacturing overhead: $2 per unit, Fixed manufacturing overhead: $35,000 per year, which computes to a $1.75 per unit cost ($35,000/20,000 annual units). In any case, the variable direct costs and fixed direct costs are subtracted from revenue to arrive at the gross profit. All other trademarks and copyrights are the property of their respective owners. It is difficult to separate costs into fixed and variable components, especially when the costs are semi-variable. Therefore, if a company increases production, they will need more supplies, which will increase the amount of variable costs. Why Variable Costs Are Important The important point about variable costs is that they do not rise and fall based upon the companys activities. } Variable Costing. The biggest advantage is how easy it is to understand variable costs. This includes any variable costs directly associated with manufacturing, such as: This also includes any direct fixed costs, such as: Depending on a companys level of transparency, an income statement using absorption costing may break out variable direct costs and fixed direct costs into two line items or combine them together to report a comprehensive COGS. 2. What is the Cost of Revenue and How to Calculate it? So, in order to establish the level of expenditure at different production levels you ought to have knowledge of cost behavior. This distinction, as applied to specific levels of management, is useful in fixing the responsibility for incurrence of costs and then for reporting cost data to those responsible for cost control. Variable costing has both advantages and disadvantages for businesses. But under absorption costing sales and production (production creates inventory) both influence profit of a period. A cost object is anything that collects cost information, such as a customer, product, service, store, geographic region, product line, and so on. match. Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. Also, variable costing statements facilitate cost volume profit (CVP) analysis because it separates cost behavior by fixed and variable. {{courseNav.course.mDynamicIntFields.lessonCount}}, Activity-Based Costing: Definition, Formula & Examples, Psychological Research & Experimental Design, All Teacher Certification Test Prep Courses, Introduction to Accounting: Help and Review, Financial Statements in Accounting: Help and Review, Mechanics of the Accounting Cycle: Help and Review, Preparing Financial Statements: Help and Review, Internal Controls in Accounting: Help and Review, Merchandising Operations and Inventory in Accounting: Help and Review, Current and Long-Term Liabilities in Accounting: Help and Review, Adjusting Accounts & Preparing Financial Statements: Help and Review, Historical Cost Accounting: Definition, Method & Advantages, Variable Costing: Method, Formula & Advantages, DSST Business Mathematics: Study Guide & Test Prep, CLEP Financial Accounting: Study Guide & Test Prep, Introduction to Financial Accounting: Certificate Program, Human Resource Management: Help and Review, College Macroeconomics: Homework Help Resource, Introduction to Macroeconomics: Help and Review, Tim Berners-Lee, Inventor of the World Wide Web: Biography & Facts, What are CRM Systems? Another example is taken from the same time frame, but this time you own a paint store that supplies paint, brushes, tape, and other supplies needed to paint the exterior of homes. Dont Thus the variable costing although useful is not a perfect managerial tool. Advantages, Disadvantages, and Examples of Variable Costing. COGS (Cost of Goods Sold) A Component in Business You Have to Know, International Financial Reporting Standards. In addition, this automated accounting system will also provide financial statements in real-time and accurately. These include white papers, government data, original reporting, and interviews with industry experts. Also read: What is The Differences between Expense and Cost in Accounting? Process Costing System, Account & Formula | What is Process Costing? Retail Industry Section 1. While it's a valuable management tool, it isn't GAAP-compliant and can't be used for external reporting by public companies. WebThe main advantage of ABC costing is to get detailed information on product costs that are derived by activities rather than using a blanket approach of spreading costs equally. Many managers use variable costing for internal reporting and decision making since it has number of advantages (Myers par. Presenting segmented income statements on a variable-costing rather than on absorption-costing basis is preferable because it results in more accurate studies of relative profitability of divisions, plants, products, territories, activities, and other segments of an organization. The separation of fixed and variable costs which are basic to variable costing is critical for making accurate evaluations. Thus, variable costing can make a significant contribution to management decision- making in such and similar areas. Depending on the type of business structure, small businesses may also be required to use absorption costing for their tax reporting. Retrieved from https://graduateway.com/advantages-and-disadvantages-of-variable-costing/, Absorption Costing and Activity Based Costing: Advantages and Disadvantages, Advantages And Disadvantages Of Activity Based Costing Accounting, The advantages and disadvantages of traditional Absorption costing techniques, Advantages and Disadvantages of Traditional Absorption Costing Techniques, Compare The Activity Based Costing Abc With Traditional Costing Accounting, Advantages Of Standard Costing Accounting, Corporate Social Responsibility (CSR) Advantages and Disadvantages. Cost to produce special order of 1,000,000 phone cases = $0.305 x 1,000,000 = $305,000. Get unlimited access to over 84,000 lessons. This analysis may be done using variable costing to determine a customer contribution margin or absorption costing to determine a customer gross margin based on full-cost cost of sales. Using variable costing income statements, management can better understand the impact of period costs on profits. Absorption costingincludes all the costs associated with the manufacturing of a product. the accounting software pricing scheme calculation, this automated accounting system will also provide financial statements in real-time and accurately. In many cases, variable costing faces a comparison with absorption costing, another costing method. By clicking Accept All Cookies, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. Management requires knowledge of cost behaviour under various operating conditions and business decisions. These costs are considered your variable costs. Gross Margin vs. Unlike absorption costing, variable costing doesn't add fixed overhead costs into the price of a product and therefore can give a clearer picture of costs. For a specific level of management, controllable costs are costs that it controls directly and non controllable costs are costs that another level of management controls. It is required for compliance with GAAP. 1). Before looking at absorption versus variable costing, it's important to understand the difference between direct and indirect costs on the income statement. In addition, financial reporting under a variety of accounting frameworks requires full costing, including Generally Accepted Accounting Principles and International Financial Reporting Standards, as well as income tax reporting. For example, if a manager has worked hard and has increased sales while controlling costs simultaneously, income will increase indicating the success and better performance of manager. WebVariable costing data make it easier to estimate the profitability of products, customers, and other segments of the business. Absorption costing ignores cost behaviour and is not able to isolate and relate accurate costs to different sales and product volumes. For example, supervisors in production department are responsible for controlling the use of direct materials in their departments. In addition, the presentation of the total amount of fixed costs on variable costing income statement emphasizes their full impact on net income, an effect partially hidden in inventory values under absorption costing. WebExpert Answer. It is not reliable because of the arbitrary allocation of manufacturing over-headed. Management benefits from the ease of monitoring operational status, making assessments, and reporting to other departments within the company. We also reference original research from other reputable publishers where appropriate. Likewise, when production decreases, variable costs typically drop proportionately. Variable manufacturing overhead of $80,000. Although variable costing is useful for internal reports and decision making, it is not acceptable for external reports in United States and almost all other countries, and tax authorities require companies to use absorption costing for calculating income taxes (Fremgen). The benefits of variable costing are as follows: Variable costing provides management with data on variable costs and contribution margins needed to make daily decisions on special orders, capacity expansion, and production shutdown. The manufacturer should accept the special order based on their variable costing method. When actual costs are equal to or less than standard costs, this reflects the organizations efficiency. report, Advantages and disadvantages of variable costing. WebAbsorption costing (also known as traditional costing, full costing, or conventional costing) is a costing technique that accounts for all manufacturing costs (both fixed and variable) as production cost. Because the winter months tend to be slow due to weather restrictions on the amount of exterior painting that can be done in your area, you anticipate your variable expenses will go down from October through December. Variable costing provides management with data on variable costs and contribution margins Furthermore, assignment of costs for a customer profitability analysis is based on cost-hierarchy concepts similar to those used in product profitability analysis. According to experts, there are two concepts for calculating production costs: total costs and variable costs. Variable costing results in gross profit that will be slightly higher. In fact, they can rapidly increase, decrease or eliminate your profit margin and lead your company into a sudden profit or a steep loss. Whether you are starting your first company or you are a dedicated entrepreneur diving into a new venture, Bizfluent is here to equip you with the tactics, tools and information to establish and run your ventures. Financial planning requires managers to estimates future sales, future Public companies are required to use the absorption costing method in cost accounting management for their COGS. Your variable costs, payroll, samples, and free supplies, totaled $275. Also variable costing assumes that the relation between the sales and the variable costs is direct, proportionate, and linear. This system helps you to know the financial condition of each branch of the business with in-depth analysis and accurate estimation of your income and reduces time-consuming manual accounting processes such as bookkeeping, asset depreciation calculations, and others. Chip Stapleton is a Series 7 and Series 66 license holder, CFA Level 1 exam holder, and currently holds a Life, Accident, and Health License in Indiana. Whereas, full costing, also known as absorption costing, is mainly for external reports. As you can see, variable costing is crucial in decision-making! These are considerations cost accountants must closely manage when using absorption costing. Companies can also break down each department or product line under variable costing, which provides a more thorough analysis of a companys business operations. As a result, when deciding whether to accept this special order, we should employ variable costing. Since most fixed costs are committed and can-not be avoided, these costs should not be part of inventory. Companies require absorption costing to prepare financial statements for external parties, as well as variable costing for better management. 1) Under variable costing method the contribution margin is calculated by taking only the variable cost incurred by the company in order to make the sales and therefore the major advantage of using variable costing is that the data from the variable . Customer profitability analysis is an application of segmented reporting in which a customer group is treated as a segment. Businesses use full costing to determine the total cost of something. Planning and Control: Managerial Decision- Making: Product Pricing Decisions: Cost Control: Inventory Changes Examples of factors that might affect this assumption include quantity discounts on materials, and labour efficiency variance. The variable costing income statement highlights the relationship between sales and income whereas the absorption costing income statement does not generally show any association between sales and income. Need a custom essay sample written specially to meet your To calculate both methods easily and without taking a long time, you can use the cloud-based accounting management software from HashMicro. Estimating future profits is often easier with variable As a result, variable costing can provide data on variable production costs quickly. Investopedia contributors come from a range of backgrounds, and over 20+ years there have been thousands of expert writers and editors who have contributed. For reporting purposes, absorption costing is required under the Financial Accounting Standards Boards Generally Accepted Accounting Principles (GAAP). Graduateway.com is owned and operated by Radioplus Experts Ltd The absorption costing method is typically the standard for most companies with COGS. Absorption Costing vs. ADVANTAGE OF VARIABLE COSTING 1. As a result, it is clear how much additional profit the manufacturer will earn from increased sales. 5 Reasons Why Visitor Management Software is Important in the New Normal, 5 Ways POS System will Make Your Retail Business Run Better, How To Use Rebates Accounting in the Retail Business, A Guide to Calculate the Property Tax in Singapore for 2022, Components, Functions, and Example of Collection Letter, The Octagon #06-2A 105 Cecil Street Singapore 069534. Under variable costing, changes in inventory or production do not affect the net operating income. This can make it somewhat more difficult to determine the ideal pricing for a product. In other words, income moves in the same direction as sales. We feature the latest updates in Information Technology, like ERP, which is connected with various industries. In October, your paint and supply sales totaled $10,000. To understand variable costing, you must understand what variable costs are and how they are calculated. ; 2006. Its like a teacher waved a magic wand and did the work for me. As production goes up, so do the variable costs. It is then utilized to calculate the cost of products produced and inventories. Investopedia requires writers to use primary sources to support their work. In order to make daily decisions about special orders, capacity expansion, and production shutdown, it gives management the information on variable costs and contribution margins they need. Tara has been at Study.com for seven years. Therefore, variable costing can quickly provide data on variable production costs. It removes the problem of fixed cost allocation which is quite tedious and at Variable costs can also apply to services that use products in the course of doing business. The fixed direct costs are allocated to operating expenses rather than COGS. Financial planning usually requires managers to approximate future sales, future production levels as well as costs. cite it correctly. Managers should be aware that both absorption costing and variable costing are options when reviewing their companys COGS cost accounting process. Contribution Margin: What's the Difference? These can include: Absorption costing is also known asfull costing. Full costing and variable costing have one thing in common: businesses can use both to calculate the cost of a product. Both operating profit and net income increased. This artificially inflates profits in the period of production by incurring less cost than would be incurred under a variable costing system. Fixed production costs may not be controllable at departmental level and therefore should not be included in the production costs at costs centre level, as it is important to match control with responsibility. When production increases variable costs also increase and vice versa. The following are excerpts from the companys income statement for the most recent fiscal year (2018): IFC does not publish an inventory of available positions. Thus, the customer feels more value is delivered. Correct writing styles (it is advised to use correct citations) Absorption costing is one of the costing methods that includes variable costs as well as fixed overheads costs in the total production cost of a product or service. Copyright 2022 service.graduateway.com. So what are you waiting for? What are the advantages of Full Costing and Variable Costing? Furthermore, youll need to be in a better position to distinguish between fixed and variable expenses as this Supplemental understanding of the topic including revealing main issues described in the particular theme; Variable costing can provide a clearer picture of per-unit cost and inventory value because it excludes the fixed overhead cost. These issues will be discussed in later chapters.6. Retail Industry." Many managers use variable costing for internal reporting and decision making since it has number of advantages (Myers par. Variable costing is a method of calculating all costs used to make a product. Advantages and Limitations of Variable Costing. However, the full cost and not only the variable cost should be the basis of product pricing in the long-run. For example, under absorption costing income may decrease although sales have increased or sales may decrease but income reported may be higher due to large inventory being created due to higher production. Full costing yields more accurate production costs. Absorption costing includes all of the direct costs associated with manufacturing a product. Variable costing, also referred to as marginal costing, is primarily used for internal reporting. Using the absorption costing method will increase COGS and thus decrease gross profit per unit produced. 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