Many companies have switched from absorption costing to variable costing for internal reporting ________.
A) to comply with external reporting requirements as required by GAAP
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

Absorption costing encourages companies to build up inventories in order to allocate fixed manufacturing overhead costs to a greater number of units produced, which can result in higher reported profits. This can create an incentive for managers to produce more than is actually needed or to hold excess inventory. Switching to variable costing alleviates this problem by only including variable manufacturing costs in product costs and treating fixed manufacturing overhead costs as period expenses. This reduces the incentive to build up inventories and can result in more accurate reporting of profitability. Compliance with external reporting requirements, increasing bonuses for managers, and accuracy of the denominator level are not the primary reasons for switching from absorption to variable costing for internal reporting.

Many Companies Have Switched from Absorption Costing to Variable Costing