Variable Costing in Accounting

you bring a big point that stuck out to me in this chapter, as daunting as it appeared. A personal goal of this class for me is to understand the role of ethics in accounting. I know that accountant can choose accounting systems, costing systems, and allocations system that benefit their organization in their particular industry, yet for me the question is how does an accountant maintain a great level of ethics that not only applies to themselves but is built in the system to protect all employees (obviously to the extent that they will take it to).

As noted the variable costing is based on sales whereas absorption costing is based on production. This means that for a manager that is using the variable costing, his bonus would be based on sales, regardless of production. Production would not affect operating income with variable costing, this is because the increased of production affects the contribution margin (Horngren el al., 2008). Yet if a manager’s bonus is based off an absorption costing system, the scenario changes radically. Rather than being based on sales, the bonus is now based on production. The absorption costing method incorporated the production-volume variance, which the name tells the meaning it is concerned with the difference of production measures rather than sales/revenue. The other concern that this manager is aware of is how the production-volume variance affects the operating income since it directly impacts the gross profit. So a manager may be tempted to produce more even though the increased production will remain unsold as ending inventory.