Variable costing is not permitted for external reporting, but it is fully acceptable as a costing method for income tax purposes

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Quizplus · Accepted Answer

Variable costing is an acceptable method for external reporting under certain circumstances, such as in industries with highly variable production levels or when the inventory is very small. However, absorption costing is the generally accepted method for external reporting as it complies with Generally Accepted Accounting Principles (GAAP). While variable costing focuses on the behavior of costs as production levels change, absorption costing considers both variable and fixed costs in determining the cost of goods sold. The advantages of variable costing are that it provides useful information for decision-making and is simple to use, while the limitations include not complying with GAAP and potentially distorting profitability in the short-term. The advantages of absorption costing are that it complies with GAAP and provides a more accurate reflection of the cost of goods sold, while the limitations include not providing information for decision-making and potentially distorting profitability in the long-term.

Variable Costing Is Not Permitted for External Reporting, but It