• Accounting , Finance ,
• 17 Aug

Variable Costing is used in internal Managerial Accounting, Cost Accounting and Finance to help make decisions. It is a part of calculating the Contribution Margin and Break-Even Analysis.  It is similar to absorption costing except that we leave out fixed manufacturing overhead.

GAAP and IFRS do not allow Variable Costing in external reporting. The main accounting principle that Variable Costing breaks is the matching principle which states that the expenses reported in a period need to match the revenues generated by these expenses in the same period.

Variable Costing

where

Direct Materials

Direct Labor

Variable Manufacturing Overhead

Quantity

Direct Materials

These are all of the materials that we consume in producing the product. These should be easy to identify and often found on the Bill of Materials. Some examples of indirect materials are general cleaning supplies, machine lubrication and general maintenance materials.

Direct Labor

This is labor that we can directly connect to producing the product. This can include assembly line staff, machine operators, etc. Do not include period costs such as administration, maintenance, and other services that do not change in relation to production levels.

Variable Manufacturing Overhead

These are overhead costs that change when manufacturing quantities change. It’s a catch-all that includes variable costs not included in Direct Labor and Direct Material and is an important part of costing and pricing. These costs can include indirect materials, shipping, handling, and utilities. The difference between general manufacturing overhead and variable manufacturing overhead is that the changes need to correlate to changes in production. Therefore we leave out costs that do not change when you make more or less units. This can include administrative and other SG&A costs that are often very small in relation to total fixed costs values.

Quantity

The number of units produced.