For external reporting on which costing technique your company's P&L should be presented, Variable cost or Absorption Cost?

For external purpose of Financial Reporting mostly In preparation of P/L accounts Absorption costing is used. Where as Variable Costing/Marginal Costing is mostly used in Internal reporting for decision making purpose only. 

Dear Ibrahim,

Kindly note that absorption costing is required for external reporting purposes, Variable costing is used for internal management reporting purposes only. The main difference between these two methods is the treatment of fixed manufacturing overheads. Under absorption costing fixed manufacturing overheads are included (absorbed) in inventory (Product cost) and recorded as Cost of sales when the product is sold. However, under variable costing, fixed manufacturing overheads are treated as a period costs and recorded when incurred,The reason that absorption method is required for external purposes is because international accounting standards require that inventory should include all costs to prepare the inventory for its intended use which include fixed manufacturing overheads. Moreover, this method complies with the matching principle of revenues and expenses.

Regards

Hamza

Complete review and checking of all entries to avoid any errors by accounts department or highlight any error for which there must be an Internal Audit department in any company.