Explain the how and why variable and absorption costing is used in manufacturing companies. - List the...

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Operations Management

Explain the how and why variable and absorption costing is usedin manufacturing companies.
- List the benefits and weaknesses of each method. In youropinion, when should the variable or absorption costing method beapplied?

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Variable Costing Variable costing is one of approach which is used for the purpose of valuation of inventory or calculation of the cost of the product in the company where only the cost linked directly with the production of output are applied to the inventory cost or the cost of the production and other expenses are charged as expense in the income statement Examples Direct Raw Material Dirrect Labour Costs Comissions etc Why is Variable cost used in Manufacturing Companies Variable costs change proportionately to the level of output For manufacturers a key variable cost is the cost of materialsManufacturers are vitally interested in unit costs with respect to changes in output levels since this determines profit per unit of output at any given price level Small businesses and new startups must keep close watch on their manufacturing costs to make a profit The term variable manufacturing cost applies to accounting methods to track business expenses and profits Variable costing is appropriate when variable costs were a high proportion of total production costs Changes in the factory environment have decreased the percentage of variable costs in total manufacturing cost With automation on the increase in industry fixed costs become an ever larger element How is Variable Cost used in Manufacturing Companies Variable Costing focuses attention on the product and its costs This interest moves in two directions ATo internal uses of the fixedvariable cost relationship and the contribution margin concept and BTo external uses involving the costing of inventories income determination and financial reporting Since variable costing treats fixed manufacturing overhead costs as period costs all fixed manufacturing overhead costs are expensed on the income statement See Answer

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