Question

Explain who the primary users are of a variable costing income statement and why (must be 200 word count)

Answer 1

The primary user of variable costing income statement is management of the organization. Variable costing income statement is not for external users. Variable costing helps the managers to make decisions related to various costs.

For example - sales managers analyse the variable costing income statement to take decision regarding sale of Different products considering net profit of different products. Products with highest contribution margin are given priority as fixed costs are deducted from contribution margin and are same for all products. So they are irrelevant for decision making.

Purchase managers would take decision regarding different costs incurred so that costs are minimised and to avoid unnecessary costs. Variable costing segregates the costs into fixed and variable. The fixed costs are deducted from contribution to get net profit.

Costs of different materials are compared. The material having least cost, without compromising the quality is preferred. The cost of labour is also checked, whether the labour is on permanent basis or on contract basis.

Focusing on contribution margin , which is the key feature of variable costing, assists the managers to understand the equation between sales , cost and profit.

Variable costing income statement is also useful for the auditor sometimes. To verify different costs and possibility of any misstatement in financial statement, he can refer to variable costing income statement.