Variable costing is not acceptable for income tax reporting purposes. Absorption costing is required on the company's income tax return.
The difference between net income under absorption costing and net income under variable costing is fixed manufacturing overhead. Under variable costing, all of the fixed manufacturing overhead is expensed as it is incurred. Under absorption costing, an allocated amount of fixed manufacturing overhead for the units that were sold is expensed, but an allocated amount of fixed manufacturing overhead for units manufactured but not sold remains in inventory. Variable costing separates fixed manufacturing cost from variable manufacturing cost by not including fixed manufacturing cost in the calculation of the cost to produce. The fixed manufacturing cost is expensed as the cost of maintaining the capacity to produce. As a result, management is better able to make short-term decisions relating to profitability and the product mix.
Which results in higher operating income during a given period depends on whether production exceeds sales or sales exceeds production during that period. When production is greater than sales, operating income under absorption costing will be higher than operating income under variable costing. When production is less than sales, operating income under variable costing will be higher than operating income under absorption costing. Nevertheless, no accounting decision should be made to achieve a specific reporting objective such as higher operating income. The only justifiable reason for any accounting decision such as use of variable costing for internal financial reporting should be for the purpose of improving the financial reporting and making it more useful.
It is true that all costs are variable in the long term. However, this has nothing to do with a reason for using variable costing.
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