Variable Costing

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Variable costing is defined as a technique where costs of production that vary with output is treated as product costs. The variable cost includes direct materials, direct labor and variable portion of manufacturing overhead. Though to determine variable cost there are many cost drivers on which basis cost is being accumulated and apportioned according to the usage of these cost drivers like number of units produced, machine used for production for how many hours, labor hours used for production and lastly how much of the transportation cost to be beard.
Example:
Beginning inventory in units 0
Units produced 4,800
Units sold 4,000
Sales $400,000
Selling price per unit = $400,000 / Unit sold 4,000 = $100.
Material cost (unit level or variable) $96,000 = $20/unit
Variable conversion cost used (committed) 48,000 $10/unit
Facility-level or fixed manufacturing cost $72,000 $15/unit
Indirect operating cost (fixed) $80,000 $16.67/unit
The variable cost of goods sold is:
Variable cost of goods sold = Material cost + Variable conversion cost
= $96,000 + $48,000 = $144,000

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