Variable Costing
A management accounting method assigning only variable production costs to products, treating fixed manufacturing overhead as a period expense for internal decision-making.
Variable Costing
A management accounting method that assigns only variable production costs to products, treating fixed manufacturing overhead as a period expense rather than a product cost.
For example, under variable costing, a furniture manufacturer would include wood, fabric, variable factory utilities, and direct labor in product costs (perhaps $250 per chair), but would expense fixed costs like factory rent, supervisor salaries, and equipment depreciation in the period incurred rather than allocating them to inventory.
Also called direct costing or marginal costing, this approach is used for internal decision-making but not permitted for external financial reporting under GAAP, which requires absorption costing. Variable costing highlights the relationship between costs, volume, and profit by separating fixed and variable components. It prevents fixed overhead costs from being deferred in inventory and reveals contribution margin (revenue minus variable costs), making it valuable for break-even analysis, make-or-buy decisions, product mix decisions, and evaluating performance in fluctuating production environments.