Arguments have been posed that although techniques such as variable costing may well be preferable for supporting management decision-making, companies are unlikely to use them, using instead the techniques that are required by Generally Accepted Accounting Principles (GAAP) for external financial statement preparation.

Required:

2 a) What is the difference in the way the cost of inventory is determined using variable costing and the technique that is acceptable under GAAP?

4 b) Describe two ways in which variable costing provides better information for management decision-making, in comparison to absorption costing. Be specific about the nature of the decisions that are affected.

2 c) What is lean production? Would the decision to use lean production eliminate the debate over whether inventory should be costed using variable or absorption costing? Explain why this position has been taken.