Question

You have just taken a job at a manufacturing company and have discovered that they use absorption costing to analyze product costs and subsequent cost-volume-profit decisions. You would like to introduce them to variable costing and explain to them why this costing method can be used and why it is helpful.

Compose a short email - 2 to 3 short paragraphs because the president it too busy to read anything longer than that - proposing a variable costing system and what that might mean for reports, analysis and comparisons. You could give a brief example if you feel that is necessary for your explanation to the president.

Answer 1

Variable Costing or Marginal Costing : Ascertainment of marginal cost and the effect on profit of changes in volume by diiferentiating between variable costs and fixed costs.it only considers variable costs,fixed costs are treated as period costs and charged to profit and loss account for the period they are incurred.

Marginal Costing: sales×units(-) Variable cost×units = Fixes cost + profit

menas,Sales (-) variable cost=contribution=fixed cost +profit

it helps in pricing policy,decison making,provides realistic profit ( the stock of W-I-P and finished goods are on variable costs,the fixed costs are written off to profit and loss account as period costs.so this gives the true profit ),it helps in the prepration of break-even analysis which shows increasing or decreasing production activity.