Final answer:
The correct option: it treats fixed MOH costs as period costs, rather than inventorial product costs
Variable costing treats fixed MOH costs as period costs, rather than inventorial product costs.
Step-by-step explanation:
Variable costing is a distinct method in cost accounting that deviates from traditional approaches by treating fixed manufacturing overhead (MOH) costs as period costs rather than incorporating them into the product's cost. Under variable costing, fixed MOH costs are expensed in the period they are incurred and are not allocated to units of production. This method stands in contrast to absorption costing, which includes fixed MOH costs in the inventory valuation of the product.
The key distinction lies in the treatment of fixed MOH costs. Variable costing considers these costs as part of the overall operating expenses for the period, irrespective of the production level. This approach provides a clearer picture of the costs directly associated with producing goods, as variable manufacturing costs are the only costs assigned to the product.
It's important to note that, while variable costing is a valuable tool for internal decision-making purposes, it is not permissible under Generally Accepted Accounting Principles (GAAP) for external reporting. This is primarily because variable costing does not adhere to the matching principle, which emphasizes the alignment of costs with revenues in the period in which they are incurred. Absorption costing, which allocates fixed MOH costs to inventory and, subsequently, to cost of goods sold, is the preferred method for external financial reporting as it ensures a more comprehensive matching of costs to revenue.
In summary, variable costing is a useful internal management tool for assessing the impact of production levels on costs. However, for external reporting compliance and a more holistic matching of costs and revenues, absorption costing is the mandated method under GAAP.