Financial planning and costing calculation is essential for every company. It helps in future forecasting related to sales, expenditure, profit & loss which needs to be mentioned in the income statement of the company. Companies need variable costing in order to prepare their statements to provide information about companyâ€™s financial position to external parties.
Variable costing is most of the time considered over absorption costing method. However, the understanding of both the methods is quite difficult for students. They get confused as to which method is more useful while profitability analysis and formulating the income statement.
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Advantages of variable costing:
Understanding of variable costing is required for formulating decisions related to product pricing. Most of the time absorption costing is considered over variable costing however variable costing provides better results in finalizing the optimum price which yields maximum sales revenue over total cost. If the pricing of the product is kept high, it will impact and decrease the sales revenue.
To control costing at all levels understanding of fixed cost and variable cost is important. Fixed costs are better known as costs related to rent, advertising, insurance, office supplies,etc, however,variable cost is dependent on the production volume of the company. If the production increases variable cost also increases and decreases at the fall of production
Inventory change & its impact- One of the major advantages of using variable costing is that itâ€™s not impacted by the change in inventory flow of the company. Students can take assistance from online tutors to make the subject simpler to understand with advantages & limitations of variable costing homework answers.In variable costing profit is just the function of sales wherein profit is not affected by the changes in inventory.
Performance Evaluation of Companies- Apart from providing solutions for financial planning and costing, the variable costing methods also assists in performance evaluations of managers within the company. The performance of managers is directly linked with the profitability of the department or unit they handled.
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The actual elements of variable costing which separates the fixed and variable costs are the basis of accurate evaluations under variable costing. This blog is an attempt to explain the concept of variable costing method through advantages and limitations of variable costing homework answers.
Limitations of Variable costing
Separating Fixed & Variable costs-
The major limitation that can be understood is that the variable costing method divides all the costs into fixed and variable cost elements. Further, the method states that there is a direct and proportionate relation between sales and variable costs which seem to be untrue in most of the circumstances. For better understanding help can be taken from online services of advantages & limitations of variable costing homework answers.
The preparation of financial statements by companies under variable costing methods faces rejections from various auditors as variable costing does not accept the general accounting principles.
The basic rule of product costing states that the complete product cost is not dependent only on variable costing. Fixed cost should also be considered while determining the product pricing, production costing, and other related long run product policies. The product is declared to be complete when it reaches its desired customers.
Discontinuing Production line-
The management team while deciding on dropping any production line has to use the variable costing results very carefully. Discontinuation of product line can create customer dissatisfaction and impact goodwill of the organization.
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