Advantages of Variable Costing - Accounting

The video explains why companies might prefer variable costing over absorption costing. Variable costing facilitates CVP analysis by categorizing costs into fixed and variable, unlike absorption costing, which assigns fixed manufacturing costs per unit. This can lead to misleading income representations, especially when sales are below the break-even point. Variable costing reflects income changes based solely on sales volume, while absorption costing can inflate income by increasing production. Variable costing aids in accurate decision-making by correctly identifying variable costs, preventing inappropriate pricing and product discontinuation decisions.

What is a primary advantage of using variable costing for CVP analysis?

• It includes fixed manufacturing costs in variable computations.

• It categorizes costs into fixed and variable components.

• It increases income by producing more units.

• It provides a less accurate representation of costs.

How does absorption costing potentially misrepresent income?

• By excluding fixed costs from production costs.

• By being influenced only by sales volume changes.

• By increasing income through unsold production.

• By categorizing all costs as variable.

Which costing method is affected only by changes in sales volume?

• Absorption costing

• Variable costing

• Neither absorption nor variable costing

• Both absorption and variable costing

Why might variable costing lead to better pricing decisions?

• It accurately identifies variable costs for additional units.

• It treats fixed overhead as variable.

• It combines fixed and variable costs.

• It increases income by producing more units.

What is a potential drawback of absorption costing in decision-making?

• It treats fixed overhead as variable, leading to poor decisions.

• It simplifies CVP analysis.

• It provides a clear view of variable costs.

• It is unaffected by production volume changes.