EXERCISE 7-9 (20 MINUTES)

3. Some managers may prefer absorption costing and others may prefer

variable costing. Managers may prefer absorption costing because ab-

sorption costing is used on external financial reports, because they pre-

fer absorption costing on theoretical grounds, or because absorption

costing profits are easier to manipulate than variable costing profits—

just increase or decrease inventories. Other managers may prefer vari-

able costing because it is easier to understand, because it is easier and

more appropriate to use in decisions, because they prefer variable cost-

ing on theoretical grounds, or because it isn’t subject to fluctuations due

to changes in inventories.

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Solutions Manual, Chapter 7 397