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Wednesday, November 3, 2010
Advantages Of Variable Costing SystemThe major advantages of variable costing are summarized as follows:
1. Variable costing is easy to understand and use. It is applicable to standard costing and budgetary control.
2. The valuation of closing stock on the basis of variability of cost will not facilitate the transfer of part of fixed cost to next period.
3. No need of computation of unit fixed cost, over and under absorption of fixed overhead because contribution margin over and above the fixed cost is the profit margins.
4. In variable costing system, profit is calculated on the basis of sales volume rather than production units.
5. Variable costing system assist management to take rationale decision analyzing the effects of sales and production policy.
6. Variable costing system concentrates management on controlling the controllable costs i.e Direct costs and avoids the tension of allocating the fixed cost without taking any basis.
7. Variable costing assist to management for taking rational decision regarding profit planning and cost control.
Disadvantages Or Limitations Of Variable Costing System
The major drawbacks of variable costing system are as follows:
1. Difficulty in segregating overhead cost into fixed and variable cost.
2. It is not justifiable to exclude fixed manufacturing overhead from inventories.
3. Wide fluctuation in profits due to seasonal demand.
4. Variable costing is not useful for long term planning and decision making.
5. Variable costing is not acceptable for external reporting purpose.
