All of the following are potential advantages of variable costing except that: a. its use is...

Question:

All of the following are potential advantages of variable costing except that:

a. its use is consistent with cost-volume-profit and incremental analysis.

b. variable costing net income is affected by changes in production levels.

c. variable costing net income is closely tied to changes in sales levels.

d. the presentation of fixed and variable cost components makes it easier to identify these costs.

Variable Cost:

Contribution margin income statement separates variable from fixed costs. Variable cost refers to the cost that directly varies on the level of activities. This means that when the company produced more units of products in the current year, the company will incur higher amount of variable cost in the current year as compared to the previous production years.

Answer and Explanation:

Answer: c. variable costing net income is closely tied to changes in sales levels.

The only difference between using the absorption costing and variable costing is the treatment of the fixed manufacturing overhead. In absorption costing, all product cost, either fixed or variable are capitalized and in case there are inventories that remained unsold at the end of the period, its cost includes the variable and fixed product cost. On the other hand, variable costing treats the manufacturing overhead as expense at the time the products are sold. This means that regardless of whether the products are sold or are still in the inventory, the fixed manufacturing cost components is also expensed in the period these are produced. Therefore, variable costing net income is not affected by the changes in the level of sales. Instead, this is only affected by the level of production.


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Variable Costing: Method, Formula & Advantages

from Financial Accounting: Help and Review

Chapter 13 / Lesson 5
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