Question

Why is variable costing an important tool in management decision making?

Answer 1

Importance of Variable Costing in management decision making:

Variable costing helps in distinguishing variable expenses from fixed expenses and understand the relationship of cost, Volume and Profit. It is easy to understand the relevant and non-relevant costs in decision making.

It also helps in understanding the activity beyond which, profits are earned. Simply, breakeven point can be known through variable costing.

Contribution can be calculated, based on which decision of units to be produced can be taken i.e., through calculation of optimum product mix.

Since it separates costs into variable and fixed costs, it is easy to control costs and meet the standards.

It also helps in product pricing.