Accountants Prefer the Variable Costing Method Over Absorption Costing Method

question 41

Multiple Choice

Accountants prefer the variable costing method over absorption costing method for evaluating the performance of a company because

• A) by using the absorption costing method,income could appear to be higher by producing more inventory.
• B) by using the absorption costing method,income could appear to be lower by producing more inventory.
• C) by using the variable costing method,the cost of goods sold will be higher as more units are manufactured and sales remain the same.
• D) by using the variable costing method,all fixed and variable costs are included in the unit cost of the product manufactured.

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Definitions:

Absorption Costing

An accounting approach that factors in every manufacturing expense, like direct materials, direct labor, and both types of overhead (variable and fixed), into the product pricing.

Variable Costing

A costing method in which all variable manufacturing costs are included as inventory costs, while fixed manufacturing overhead is treated as an expense in the period incurred.

External Reporting

External reporting involves the preparation and presentation of financial statements and other reports by a company to provide financial and operational information to external stakeholders, such as investors, creditors, and regulatory agencies.

Absorption Costing

An accounting method that includes all manufacturing costs in the cost of a product.