What is variable costing?

Variable costing is a managerial accounting method that focuses solely on the costs that vary directly with the level of production or sales. This means it considers only the variable costs involved in manufacturing a product or providing a service, such as direct materials, direct labor, and variable manufacturing overhead. By excluding fixed costs from the product costs, variable costing allows businesses to understand the contribution margin for each unit sold and how variable expenses impact profitability.

This method is particularly useful for internal decision-making, as it helps managers assess the profitability of individual products, plan for future production needs, and set pricing strategies based on variable costs. This clear focus on direct production costs enables businesses to make more informed operational decisions without the complexity introduced by fixed costs, which do not change with production volume.

In contrast, the other options describe concepts that are either not specific to variable costing or pertain to broader accounting or budgeting practices.