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Variable Costing is a type of accounting method in which only variable manufacturing costs are included like direct labour, direct materials, etc. The costs that vary depending on a company’s production volume are known as variable cost i.e. the variable costs rise as production increases and fall as production decreases. Variable cost is different from fixed cost such as rent, insurance, etc. are not affected by the production output. Direct material costs or direct labour costs can be included in variable costs to complete a project.Advantages and Limitations of Variable Costing Assignment Help provides basis of knowledge and a depth idea about variable costing.
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Advantages and Limitations of Variable Costing
The advantages of variable costing explained in Advantages and Limitations of Variable Costing Assignment Help are: –
- Planning: –
For short term planning, controlling and decision making variable costing income statements are more useful internally than absorption costing statements. It emphasises on cost behaviour and provides information to the managers. To get a successful control function, division of costs is done in variable and fixed components which are achieved only under variable costing.
- Decision Making: –
For various short-term decision like entry into new market, production levels, product mix or other special promotional events relevant costs are required. In order to achieve this costs are split into fixed and variable components which is only possible under variable costing.
- Product Pricing Decisions: –
Variable costing is very useful as it provides useful information to the managers. In many cases it serves as the basis of product pricing.
- Cost Control: –
Variable manufacturing costs varies with the change in the volume of production and in the cost of product. Thus it makes variable manufacturing cost controllable at cost center level by operating management.
The limitations of Variable Costing explained in Advantages and Limitations of Variable Costing Assignment Help are: –
• In Variable Costing method all costs should be divided into fixed and variable component. It is also assumed in this method that the relation between the sales and the variable cost should be direct, proportionate and linear which cannot be true under all circumstances.
• A product’s complete cost does not depend only on variable costs. Fixed costs are also considered in determining the product cost.
• Variable costing is not a perfect managerial tool.
• In various countries, tax laws require the use of absorption costing.
• The financial statements that are prepared under this method do not comply with generally accepted accounting principles(GAAP).
• Fixed costs is not assigned by variable costing to the products and hence the production cost cannot be matched with the income.
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