Accounting Dictionary

Variable Costing

Variable costing computes the cost of a product using only the variable costs, none of the fixed costs.

Variable costing is not allowed in statements using GAAP and not allowed in statements received by external users. It may be used for internal reports. ABC Company made 100 boxes. The wood was $100, the labor was $500, the variable overhead was $200, the fixed overhead was $200, and the fixed costs were $6000. If I were using variable costing I would say the boxes cost $8 each (100+500+200/100). If I were using Generally Accepted Accounting Principles I would say the boxes cost $70 each (100 +500+200+200+6000/100). The GAAP method takes in all the costs, not just the variable ones.

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