Variable costing

Definition

Variable costing is a managerial accounting method where only variable production costs are included in product costs. Fixed manufacturing overhead is treated as a period expense.

5 Must Know Facts For Your Next Test

1. Variable costing includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs.
2. Fixed manufacturing overhead is expensed in the period it is incurred under variable costing.
3. Variable costing is useful for internal decision-making but not acceptable for external financial reporting under GAAP.
4. In variable costing, net income can fluctuate more with changes in sales volume compared to absorption costing.
5. Contribution margin analysis and break-even analysis often use variable costing data.

Review Questions

• What types of costs are included in product costs under variable costing?
• How are fixed manufacturing overhead costs treated under variable costing?
• Why is variable costing not acceptable for external financial reporting?

Related terms

Absorption Costing: A method where both fixed and variable production costs are included in product costs.

Contribution Margin: Sales revenue minus all variable expenses; used to cover fixed expenses and profit.

Break-Even Analysis: A calculation to determine the sales volume at which total revenues equal total expenses, resulting in zero profit or loss.