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GAAP does NOT preclude use of variable costing for external financial reports. The only place the literature addresses this question is in ARB (Accounting Research Bulletin #4) which states that the exclusion of all overhead from inventory is unacceptable. Variable costing does not attempt to exclude overhead associated with the production of product, i.e. variable overhead. But it does exclude the cost of providing productive capacity.
It is odd that in its discussion of the current standard for segment reporting that the FASB said that external users of financial information should received data prepared on a basis consistent with that used by management for decision making. Since it is widely accepted that variable costing is useful to management, can this statement by the FASB be consider an endorsement of variable costing in the financial statements of companies which use it internally?
What else can I help you with?
Is direct costing the same as variable costing?
Variable costing is called marginal costing while direct costing is separate concept.
Is variable costing only on the income statement?
Variable costing primarily affects the income statement, as it only includes variable manufacturing costs in product costs, impacting the calculation of gross margin and operating income. However, it also influences financial analysis and decision-making by providing insights into cost behavior and profitability. Unlike absorption costing, variable costing does not allocate fixed manufacturing overhead to products, which can affect inventory valuation on the balance sheet but is not a primary focus of variable costing. Thus, while its main application is on the income statement, its implications can extend to other financial statements.
What costing method considers variable factory overhead a product cost?
variable costing
What are the advantages of direct costing and absorption coting?
Direct costing, or variable costing, offers advantages such as clearer insights into variable costs and better decision-making for short-term pricing and production since it excludes fixed overheads. Conversely, absorption costing includes all manufacturing costs, providing a comprehensive view of product profitability, which can be beneficial for financial reporting and inventory valuation. While direct costing aids in operational efficiency, absorption costing aligns with external reporting requirements and can influence inventory management strategies. Both methods serve distinct purposes depending on managerial needs and regulatory compliance.
Would you recommend variable costing or absorption costing as a source of information for managers?
I would recommend variable costing for managerial decision-making because it provides clearer insights into the impact of variable costs on profitability. This method helps managers understand how changes in production volume affect costs and profits, facilitating better budgeting and performance evaluation. Absorption costing, while useful for external reporting, can obscure the relationship between fixed costs and production levels, potentially leading to less informed decisions. Therefore, for internal management purposes, variable costing is generally more effective.
How is the use of variable costing is limited?
Variable costing is limited primarily because it does not comply with generally accepted accounting principles (GAAP), which require absorption costing for external financial reporting. This method can also distort profitability analysis, as it excludes fixed manufacturing overhead from product costs, potentially misleading managers about the true cost of production. Additionally, variable costing may not be suitable for long-term decision-making, as it focuses on short-term variable costs and can overlook the impact of fixed costs on overall profitability.
Why marginal costing method not Suitable to be used by manufacturer for external financial reporting and tax purpose?
I think..... In marginal costing method only variable cost is considered as product cost and fixed cost is not considered as product cost. But in reality product cost include fixed and variable, thus both variable and fixed costs should be considered while allocating cost. Marginal costing is used for inside reporting and absorption costing is used for outsider to clarify the real cost of product........ Am i right? Please confirm it
Is direct costing the same as variable costing?
Variable costing is called marginal costing while direct costing is separate concept.
Is variable costing only on the income statement?
Variable costing primarily affects the income statement, as it only includes variable manufacturing costs in product costs, impacting the calculation of gross margin and operating income. However, it also influences financial analysis and decision-making by providing insights into cost behavior and profitability. Unlike absorption costing, variable costing does not allocate fixed manufacturing overhead to products, which can affect inventory valuation on the balance sheet but is not a primary focus of variable costing. Thus, while its main application is on the income statement, its implications can extend to other financial statements.
Do companies in either the service sector or the merchandising sector make choices about absorption costing versus variable costing?
Yes, companies in both the service sector and the merchandising sector make choices between absorption costing and variable costing. Absorption costing includes all manufacturing costs, both fixed and variable, in the cost of goods sold, while variable costing includes only variable manufacturing costs. The choice between the two can significantly impact financial statements and tax liabilities, influencing management decisions and performance evaluation. Companies often select the method that aligns with their financial reporting needs and internal management strategies.
What costing method considers variable factory overhead a product cost?
variable costing
What is another name for variable costing?
'''Direct Costing'''
What are the advantages of direct costing and absorption coting?
Direct costing, or variable costing, offers advantages such as clearer insights into variable costs and better decision-making for short-term pricing and production since it excludes fixed overheads. Conversely, absorption costing includes all manufacturing costs, providing a comprehensive view of product profitability, which can be beneficial for financial reporting and inventory valuation. While direct costing aids in operational efficiency, absorption costing aligns with external reporting requirements and can influence inventory management strategies. Both methods serve distinct purposes depending on managerial needs and regulatory compliance.
Would you recommend variable costing or absorption costing as a source of information for managers?
I would recommend variable costing for managerial decision-making because it provides clearer insights into the impact of variable costs on profitability. This method helps managers understand how changes in production volume affect costs and profits, facilitating better budgeting and performance evaluation. Absorption costing, while useful for external reporting, can obscure the relationship between fixed costs and production levels, potentially leading to less informed decisions. Therefore, for internal management purposes, variable costing is generally more effective.
If you were a candy manufacturer which costing system should you use full absorption costing or variable costing?
full absorption costing
What are the differences between Absorption Costing and Variable Costing?
VARIABLE COSTING VERSUS ABSORPTION COSTINGAbsorption costing applies all manufacturing overhead to production costs while they flow through Work-in-Process Inventory, Finished-Goods Inventory and expenses on the income statement while Variable Costing only applies variable manufacturing overhead.Fixed manufacturing overhead is expensed immediately as it is incurred under variable costing while it is inventoried until the accounting period during which the manufactured goods are sold under absorption costing.
Which costing method is used for external reporting purpose?
absorption costing
