To reduce the undesirable incentives to build up inventories that absorption costing can create, a number of companies use variable costing for internal reporting.

Question

Quizplus · Accepted Answer

Variable costing only includes variable production costs in inventory valuations, while absorption costing includes both variable and fixed costs. This means that under absorption costing, production of inventory can increase net income by spreading out fixed costs over more units, creating an incentive to build up inventory. Using variable costing for internal reporting eliminates this incentive.

To Reduce the Undesirable Incentives to Build Up Inventories That