Asked by Karan Patel on May 12, 2024

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Variable costing is more compatible with cost-volume-profit analysis than is absorption costing.

Variable Costing

An accounting method that includes only variable production costs (direct labor, direct materials, and variable manufacturing overhead) in product costs.

Cost-Volume-Profit Analysis

An accounting technique used to determine how changes in costs and sales volume affect a company's operating income and net income.

Absorption Costing

An accounting method that includes all manufacturing costs (direct materials, direct labor, and overhead) in the cost of a product.

  • Understand the key differences between absorption costing and variable costing methods.
  • Grasp the relationship between production and sales volume and their impact on net operating income under different costing methods.
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HC
Heather CuretonMay 15, 2024
Final Answer :
True
Explanation :
Variable costing separates fixed and variable costs, making it easier to analyze the effects of changes in sales volume on contribution margin and net income, which are key components of cost-volume-profit analysis. Absorption costing, on the other hand, includes fixed manufacturing overhead as a product cost, which can distort contribution margin calculations and make cost-volume-profit analysis more difficult. Therefore, variable costing is considered more compatible with cost-volume-profit analysis.