Many companies use variable costing for internal reporting to reduce the undesirable incentive to build up inventories.

Question

Quizplus · Accepted Answer

Variable costing only includes variable production costs in the cost of goods sold and does not allocate fixed overhead costs. This means that as production levels increase, the cost of goods sold also increases and there is no incentive to build up inventories as it will not artificially inflate profits. This is why many companies use variable costing for internal reporting to reduce this undesirable incentive.

Many Companies Use Variable Costing for Internal Reporting to Reduce