Question

how can financial data prepared on the basis of variable costing can assist management in the development of short-run pricing policies?

Answer 1

For internal use of decision making managers prefer variable costing over absorption costing. Variable costing is also called Direct costing.

Cost of goods manufactured = direct labour + direct materials + variable factory overhead

In variable costing , fixed factory overhead will not be included.

For short term pricing policies, variable costing is prefered, because,

1. It helps in product pricing and it also helps to decide whether to continue or discontinue the product, without taking fixed overhead into consideration.

2. Variable costing reports can be prepared for geographical areas, customers, distribution channels, sales persons etc., which play main role in short run pricing policies.