This video highlights several disadvantages of using Variable Costing.
Variable Costing is not considered GAAP. A company that decides to use Variable Costing must continue using Absorption Costing to prepare financial statements for external users such as investors and creditors. Thus, a company that uses Variable Costing must maintain two separate cost systems: Absorption Costing for external reporting purposes, and Variable Costing for internal decision-making purposes. The additional time and cost of maintaining two cost systems may deter some executives from adopting Variable Costing.
A company that implements Variable Costing will also need to spend time educating its employees about the new cost system. This is particularly important because, under Variable Costing, the company’s per-unit product cost will decrease. This is because Variable Costing does not include fixed manufacturing overhead as a product cost, but instead treats it as a product cost. If the company’s sales staff members are not aware of this, they may simply observe that the per-unit product cost is lower and assume that this means the company is producing the product more cheaply. They may then decide to lower the price, which would be counterproductive since the company’s costs have not in fact changed (fixed manufacturing overhead is just being classified differently).