Respuesta :
When sales are less than production during the year.
What is Variable costing?
In management and cost accounting, the notion of variable costing refers to the exclusion of fixed manufacturing overhead from the product cost of production. The approach stands in contrast to absorption costing, which allocates the fixed production costs to the output of products. Variable costing is not allowed to be utilized in financial reporting under accounting standards like IFRS and GAAP.
Financial Reporting with Variable Costs
Although the use of variable costing in financial reporting is prohibited by accounting standards like GAAP and IFRS, managers frequently utilize this costing strategy to:
- Perform a break-even analysis to ascertain the number of units that must be sold in order to start making a profit.
- Find the product's contribution margin to better comprehend the connection between cost, volume, and profit.
- Eliminate fixed manufacturing overhead expenses, which can be problematic because of how fixed costs are distributed across each product, to make decision-making easier.
What is Absorption Costing?
A managerial accounting technique known as "absorption costing," sometimes known as "full costing," is used to record all expenses related to producing a certain product. This strategy accounts for both direct and indirect expenses, including direct supplies, direct labor, rent, and insurance.
According to generally accepted accounting standards (GAAP), absorption costs are necessary for external reporting.
Therefore, When net income is the same under variable and absorption costing, sales are less than production during the year.
For more information on variable and absorption accounting, refer to the given link:
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