Question

When should a company use absorption costing when setting sales prices? When should it use variable costing?

Short answer

Answer

Absorption costing should be used for long-term planning while variable costing is used for short-term planning.

Step-by-step solution

Use of absorption costing

Absorption costing should be used when the sales price is calculated for long-term planning because it is important to include fixed manufacturing overhead.

Use of variable costing

Variable costing should be used for short-term projects because in short-term projects fixed costs are sunk costs and irrelevant in decision making.