EXERCISE 7-9 (20 MINUTES)

4. The advantages of using the variable costing method for internal report-

ing purposes include the following:

● Variable costing aids in forecasting and reporting income for decision-

making purposes.

● Fixed costs are reported in total amount, thereby increasing the op-

portunity for more effective control of these costs.

● Profits vary directly with sales volume and are not affected by

changes in inventory levels.

● Analysis of cost-volume-profit relationships is facilitated and man-

agement is able to determine the break-even point and total profit for

a given volume of production and sales.

The disadvantages of using the variable costing method for internal re-

porting purposes include the following:

● Variable costing lacks acceptability for external financial reporting and

cannot be used for income taxes in the United States. As a result, ad-

ditional record keeping costs may be required.

● It may be difficult to determine what costs are fixed and what costs

are variable.