Variable Costing Method

Variable costing is an accounting method where only the costs directly linked to producing a product—such as materials and labor—are counted as product costs. These are called variable costs because they change with the level of production. Fixed costs, like factory rent or salaries, are treated as period expenses and are not included in the product cost. This approach helps businesses understand how producing more or fewer units impacts their profitability, providing clear insight into the contribution margin and aiding in decision-making without the influence of fixed costs on product cost calculations.