Even if a company must use absorption costing for its external reports, a manager can use variable costing statements for internal reports. No particular accounting problems are created by using both costing methods–the variable costing method for internal reports and the absorption costing method for external reports. The adjustment from variable costing net operating income to absorption costing net operating income is a simple one that can be easily made at year-end.
Top executives are typically evaluated based on the earnings reported to shareholders on the external financial reports. This creates a problem for top executives who might otherwise favor using variable costing for internal reports. They may feel that since they are evaluated based on absorption costing reports, decisions should also be based on absorption costing data.
Absorption Costing Around the World:Absorption costing is norm around the world for external financial reports. After the fall of communism, accounting methods were changed in Russia to bring them into closer agreement with accounting methods used in the west. One result was the adoption of absorption costing
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