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Variable Costing new

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Variable Costing
1 A. What is the Major Rationale for Using Variable Costing?
Variable costing is important in accounting since it recognizes that expenses of products
do not change in a linear depending on the volumes manufactured. Since the cost of
manufacturing a product is composed of fixed cost and variable cost, only the latter changes
when you produce more products. Therefore, for a manufacturer, the use of variable cost enables
him/ her to identify the exact cost he will incur if he produces an additional product. Similarly,
he/she is able to identify the exact profits that he/she will make an additional sale (Warren,
Reeve, and Duchac 27-43). On the contrary, absorption costing assumes apportion all costs
including fixed cost to each unit. Therefore, if a manufacturer produces additional units, he/ she
has fewer costs than the one reflected when using absorption costing.
1b. Discuss Why Variable Costing May Not be Used for Financial Reporting
Variable costing is not used in financial statements since an individual makes full payment of the
fixed costs when calculating profits. Therefore, if an individual has not sold all products, the
profit reflected is less than the one that would be shown if absorption costing was used (Warren,
Reeve, and Duchac 27-43).
2a. What is Meant by the Term Sales Mix?

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Simply, sales mix is the proportion of units of products that a company sells. For example, is a
shop sell 10 oranges, 15 mangos, and 75 packets of milk, then its sales mix is 10% oranges, 15%
mangos, and 75% milk.
2.B How Does Sales Mix Affect the Calculation of the Break-Even Point?
Sales mix is important in the calculation of the break-even point since each product that
is sold may have a different contribution margin. The contribution margin is calculated by
subtracting the variable cost from sales revenue. Since a company’s fixed cost is shared by all
units, and the break even point refers to the point at which the contribution of units sold is equal
to the fixed cost, then the sales mix affects the calculation of break-even point (Warren, Reeve,
and Duchac 27-43). For example, if a company has a fixed cost of $10,000, and the option of
selling two units of three alternative products, A, B, and C. The contribution margins are $10,
$15, and $25.
The breakeven point if the company produces A and B equally is
10,000/ (10+15)= 400 units
The breakeven point if the company produces C and B equally is
10,000/(15+25)= 250 units

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Surname 1 Name Tutor Cost Date Variable Costing 1 A. What is the Major Rationale for Using Variable Costing? Variable costing is important in accounting since it recognizes that expenses of products do not change in a linear depending on the volumes manufactured. Since the cost of manufacturing a product is composed of fixed cost and variable cost, only the latter changes when you produce more products. Therefore, for a manufacturer, the use of variable cost enables him/ her to identify the exact cost he will incur if he produces an additional product. Similarly, he/she is able to identify the exact profits that he/she will make an additional sale (Warren, Reeve, and Duchac 27-43). On the contrary, absorption costing assumes apportion all costs including fixed cost to each unit. Therefore, if a manufacturer produces additional units, he/ she has fewer costs than the one reflected when us ...
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