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

Question

Quizplus · Accepted Answer

Switching from absorption costing to variable costing helps to reduce the undesirable incentive to build up inventories because under absorption costing, fixed manufacturing costs are included in the cost of inventory, leading to higher reported profits when inventory levels increase. This can result in managers deliberately increasing inventory levels to boost profits, which is not an efficient use of resources. Variable costing eliminates this incentive by only including variable manufacturing costs in the cost of inventory, so managers are not rewarded for holding excess inventory.

Many Companies Have Switched from Absorption Costing to Variable Costing