Which costing method(s) provide cost information that is helpful to management in setting prices?

• A. Both absorption costing and variable costing
• B. Only absorption costing
• C. Only variable costing
• D. Neither absorption costing nor variable costing

Answer: (A)

Verified step by step guidance

1. Understand the concept of absorption costing: Absorption costing includes all manufacturing costs (both fixed and variable) in the cost of a product. This method provides a comprehensive view of product costs, which can be helpful for long-term pricing strategies and financial reporting.
2. Understand the concept of variable costing: Variable costing includes only variable manufacturing costs in the cost of a product. Fixed manufacturing costs are treated as period costs. This method is useful for short-term decision-making and analyzing the impact of changes in production levels on profitability.
3. Compare the two methods: Absorption costing is more suitable for external reporting and long-term pricing decisions, while variable costing is better for internal decision-making and understanding the contribution margin of a product.
4. Evaluate the usefulness of both methods: Management can use absorption costing to ensure all costs are covered in pricing decisions, while variable costing helps in setting prices based on incremental costs and contribution margin analysis.
5. Conclude that both absorption costing and variable costing provide valuable cost information for management in setting prices, depending on the specific decision-making context and goals.