Q-21-9-RQ - Horngren'S Financial And Managerial Accounting

Question

When should a company use absorption costing when setting sales prices? When should it use variable costing?

Step-by-Step Solution

Answer

Answer

 

Absorption costing should be used for long-term planning while variable costing is used for short-term planning.

 

Step 1: Use of absorption costing

Absorption costing should be used when the sales price is calculated for long-term planning because it is important to include fixed manufacturing overhead.

Step 2: Use of variable costing

Variable costing should be used for short-term projects because in short-term projects fixed costs are sunk costs and irrelevant in decision making.