Financial planning usually requires managers to approximate future sales, future production levels as well as costs. So, in order to establish the level of expenditure at different production levels you ought to have knowledge of cost behavior.
Furthermore, you’ll need to be in a better position to distinguish between fixed and variable expenses as this is indeed essential to making exact cost estimates at different levels of production and sales. With that said, let’s dive into a few advantages of variable costing.
Management needs knowledge of cost behavior under various operating conditions and business decisions. Relevant costs are also required for a variety of short-term decisions such as changes in production levels, entry into new markets or special promotional activities. These decisions oblige cost to be split into their fixed and variable components and this can only be possible only under variable costing.
Actually, projection of future costs and revenues for different activity levels or the use of relevant cost decision-making techniques are facilitated and also highlighted in variable expenses. Variable costing is also vital since the favorable margin between selling prices and variable cost should provide a constant reminder of income forgone because of lack of sales volumes. And a favorable margin justifies a higher production level.
When it comes to cost control, costs should probably be pooled into separate variable and fixed totals. Separating variable and fixed costs supports the use of standards, budgets and responsibility reporting which help managements to control costs. All costs are further controlled in the long run by someone within a business enterprise. However, not all are controlled within the same level of management.
Variable costing only include variable manufacturing costs which varies with changes in the volume of production. As a result, this makes variable manufacturing costs controllable at cost centre level by the operating management. Fixed production costs on the other hand may not be controlled at department level and so should not be included in the production costs at costs centre levels, as it’s crucial to match control with it’s responsibility.