The use of variable costing for performance evaluation eliminates the incentive for managers to overproduce.Select one:TrueFalse

Analysis of the Statement

1. Understanding Variable Costing: Variable costing, also known as direct costing, includes only variable manufacturing costs in the cost of a product. Fixed manufacturing costs are treated as period costs and are expensed in the period incurred.

2. Overproduction Incentive: Under absorption costing, fixed manufacturing costs are allocated to units produced, which can create an incentive for managers to overproduce since more units would mean that the same fixed costs are spread over more units, artificially reducing the per-unit cost and potentially increasing profits in the short term.

3. Impact of Variable Costing: In contrast, with variable costing, fixed costs are not included in the inventory value. Therefore, manufacturing more units does not affect the way fixed costs are treated in terms of cost per unit. The expenses are reported in full in the current period, and thus, there’s less incentive to overproduce purely for accounting benefits.

Conclusion

The statement is True. The use of variable costing for performance evaluation indeed eliminates the incentive for managers to overproduce, as fixed costs do not affect the product cost in the same way as under absorption costing.