It has some limitations/disadvantages which are stated below: Disadvantages or Limitations of Variable Costingĭespite all the advantages, we cannot term variable costing flawlessly. As a result, it becomes easily understandable as to how much additional profit will be earned from how much additional sales. Variable costing net income changes with sales. Income statements under variable costing give data relating to “Gross contribution margin,” “Contribution margin,” and “Total fixed costs.” These data can easily be used in the c-v-p analysis. Variable costing can readily supply data on variable costs and contribution margin, which management needs each day to make decisions relating to special order, expansion of capacity, shut-down of production, etc. The advantages of variable costing can be summarized as follows: There is no need to adjust under or over allocation of fixed factory overhead in variable costing as it is not included in the cost of production.Here, the variable cost of goods sold is subtracted from the sales to determine C/M, and all fixed costs are subtracted from C/M to determine net income. Contribution Approach is followed in determining net income.Variable costing operating income changes with sales, not with production.Since fixed factory overhead is not included in the cost of production, the cost of inventory is less as compared with absorption costing.Here, fixed factory overhead is regarded as a period cost and is charged against revenue in the period it is incurred,.
In variable costing, product cost is determined only based on variable manufacturing cost.Variable costing has the following features:
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