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Abstract:
Variable Costing has now arrived of a period and is providing to be an exceptionally important tool in planning and controlling operations in many large industrial companies. However still not as broadly working as absorption costing, it is progressively gaining popularity in use. In Variable Costing, product costs contain only those manufacturing costs which are directly related to the product and vary with production volume. Under absorption costing all manufacturing costs, direct and indirect, are included as cost of manufactured goods. This article discusses variable costing that is used only for internal reporting and analysis and its applicability in the manufacturing situation. Variable and absorption costing are not commonly exclusive. Accountants find that variable costing more effectively meets internal requirements because it provides better insight into cost relationship while the absorption costing method meets external reporting requirements.
Keywords: Absorption costing, Contribution margin, Variable Costing, Fixed factory overhead, Variable factory overhead.
1. Introduction
Cost accounting supplies management with the necessary information for decision making. Accounting information enables a manager to take the right decision instead of his relying upon intuition and hunch. Accounting information concerning expected future costs and revenues, and an analysis of the same, will assist management in making right decision. Product costing is one of the objects of cost accounting. Appropriate costing of a product is essential for taking appropriate managerial decisions. Costing is, according to the definition of the Chartered Institute of Management Accountants (CIMA) Terminology (p.10), "the process of determining the costs of products, services and activities". Accordingly, the cost of manufactured products is generally based on either Absorption Costing (the full costing concept) or Variable Costing (the variable costing concept). As all of we are familiar with the methodologies and accounting treatment of absorption costing, this paper has attempted to give a detailed aspect of variable costing .The purpose of this paper is to review literature on variable costing in our manufacturing environment. The paper will be useful to researchers, cost accountants and others concerned with product costing to understand the official importance of variable costing. The main limitation is that this is not an empirical investigation of variable costing in our manufacturing firms.
2. Meaning of Direct or Variable Costing
Under absorption costing, all factory overhead costs,...