Question
Yes, absorption costing includes all costs associated with production, and knowing the all in cost certainly important. However, suppose management decides to track production cost
Yes, absorption costing includes all costs associated with production, and knowing the "all in" cost certainly important.
However, suppose management decides to track production cost per unit to use as a basis for evaluating the production line manager. In January, production cost per unit was $15, but in February it jumped to $5,010 under absorption costing. Should the production line manager be fired because of this cost per unit?
But looking at it from the variable costing perspective, there was no change in cost per unit throughout the three months! Since the production line manager has no control over the fixed costs, it would be unfair to use absorption costing for this purpose.
Can you think of other types of situations/decisions that use variable costing?
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