VARIABLE COSTING 1
Articles on variable costing
What is variable costing
As depicted in the article, variable costing is a concept utilized in managerial and cost accounting. The process involves excluding fixed manufactured overheads from the product’s cost of production (Novak, 2016). However, the method is different from cost absorption, where the manufacturing overhead is allocated to the produced products. Variable costing is not allowed in accounting frameworks such as GAAP and IFRS. Variable costing is not permitted in external reporting because it follows all the underlying guidelines of accounting that include the matching principle. Variable costing upholds poorly the matching principles since the related expenses are not recognized in the same period as the related revenue.
Variable costing in financial accounting
According to the author, financial managers widely utilize variable costing despite the strategy being prohibited by the GAAP and IFRS. The financial managers use the approach to execute a break-even analysis to determine the units number required to be sold for profit generation (Kristensen, 2020). It is used to determine the contribution margin on products and services, which helps understand the relationship between profit, cost, and profit. The approach plays a crucial role in facilitating decision-making by excluding fixed manufacturing overhead costs, which results in difficulties related to how the fixed costs are located to each product.
Relationship between variable costing and absorption costing
The article dictates that several costs go to the product in variable costing. The costs include direct material, variable manufacturing overhead, and direct labor. On the other hand, the product costs in absorption costing include fixed manufacturing direct overhead material, direct labor, and variable manufacturing overhead (Gersil, 2016). The author states that it is important to keep in mind that product costs are costs that go to the product, while period costs are expensed in the period incurred.
While making managerial decisions, the manager should not include fixed costs in calculations. Variable costing provides managers with the necessary information to prepare a statement of contribution margin income. The process leads to a more effective and efficient cost-volume-profit analysis.
Gersil, A., & Kayal, C. (2016). A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting. International Journal of Management, 7(3).
Kristensen, T. B. (2020). Enabling the use of standard variable costing in lean production. Production Planning & Control, 1-16.
Novak, P., Papadaki, Š., Hrabec, D., & Popesko, B. (2016). Comparison of managerial implications for utilization of variable costing and throughput accounting methods. Journal of Applied Engineering Science, 14(3), 351-360.