Question

Write a professional e-mail to a coworker justifying the use of either variable or absorption costing (you select one) as it relates to which method provides the most useful information to management.

Answer 1

Companies need absorption costing to prepare statements to satisfy external parties and variable costing for better management. Both the costing methods have benefits and limitations.

Sharing Few point why Variable Costing is beneficial than absorption costing:

1. Variable costing provides a better understanding of the effect of fixed costs on the net profits because total fixed cost for the period is shown on the income statement.
2. Various methods of controlling costs such as standard costing system and flexible budgets have close relation with the variable costing system. Understanding variable costing system makes the use of those methods easy.
3. Companies using variable costing system prepare income statement in contribution margin format that provides necessary information for cost volume profit (CVP) analysis. This data cannot be directly obtained from a traditional income statement prepared under absorption costing system.