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Should managers then be evaluated using absorption costing income figures or variable costing income figures? Explain

Should managers then be evaluated using absorption costing income figures or variable costing income figures? Explain
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Answer #1

Manager can be evaluated using variable costing income figure and it is justifiable because in variable costing all the the fixed overhead will be charged on all the no of unit sold during the product accordingly real profit realized by operation can be determined.

However, In absorption costing, fixed overheead cost are charged equally on all the the unit produced, so unit lying in stock will also contain the fixed overhead component . Hence, profit determined by absroption costing will not show real profit earned in operation because some of the cost of Fixed overhead has already been added in closing stock.

It can be said that if manager is being eveluated on the basis of real profit/income earned by organization then it's recommended to used variable costing.

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