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Variable costing is the term used for the expenses, including all of the variable costs such as those manufacturing costs which are directly related to the production and manufacturing of the products. These costs are direct labor costs, direct material costs, and the variable factory overhead. They are called variable costs because they are directly attached to the manufacturing processes and vary with respect to the volume of production. This doesn’t include the costs that are fixed, whether they are used during the process or being used before the start of the production. The variable costing excludes the costs related to the wages of the employees and the other staff.
Marginal or direct costing may also be used to refer to variable costing. It has been used for financial evaluation purposes, generating the financial and fiscal reports, and other economic aims. It provides an in-depth analysis of the products and their costs. The variable costing is useful for the internal and external business relationships, such as the relationship between the variable costs and the fixed costs. This accounting method is more useful because the fixed costs calculated per unit vary when the volumes change, but the variable costs, or the marginal costs, remain constant for different volumes of sales and manufacturing.
The information that is mandatory for the evaluation of the cost profit analysis is provided by this method. Moreover, there is often a case that the management authorities consider the unit product costs as the variable costs under the absorption costing. But in variable costing, this is not an issue because it only contains the variable costs related to the production. Variable costing clearly explains and depicts the effects of the fixed costs on the profits and sales, because the fixed costs are shown clearly on the income statements.
The marginal costs are the costs that are obtained by the subtraction of all of the variable costs from the total sales revenue. In variable costing, the earnings on the total sales is determined, rather than on a per unit product basis. It is determined by the subtraction of the fixed costs from the contribution margin. Despite the fact that variable costing is more useful than any other accounting method, absorption costing is more commonly used. It could be the reason that fixed costs are just as significant as the variable costs are.