Many companies have switched from absorption costing to variable costing for internal reporting:
A)to increase bonuses for managers.
B)so the denominator level is more accurate.
C)to reduce the undesirable incentive to build up inventories.
D)to comply with external reporting requirements.

Question

Quizplus · Accepted Answer

Switching from absorption costing to variable costing for internal reporting helps reduce the undesirable incentive to build up inventories, as variable costing only includes variable production costs in the cost of goods sold and excludes fixed manufacturing overhead, which can encourage managers to minimize inventory levels. The other options do not provide valid reasons for the switch to variable costing.

Many Companies Have Switched from Absorption Costing to Variable Costing