Sir,

What is the base of evaluating variable costing? How can we do that?

Loveleen

Depending on the type of business you are in, Variable Costs are those costs that are involced with the cost of sales (COGS). Example of a variable cost would be meals, travel, indirect labor (compounded overhead), etc. The reverse comparison would direct costs; i.e. rent, insurance premiums, etc. XP's that are always the same amount each month.

Hope this helped you.

B1953

How do you get rid of Google's shopping cart? Also, how do you fix Google Maps as mine is all screwed up?

B:

variable cost means a costs which varies with your activity level PROPORTIONATELY, it totally depends on the nature of your business, one may b considered as variable by one business where as fixed for an other.

Variable costing is a method in which the costs to be inventoried include only the variable manufacturing costs. Fixed factory overhead is treated as a period cost-it is deducted along with the selling and administrative expenses in the period incurred. That is,

Direct materials $xx

Direct labor xx

Variable factory overhead xx

Product cost $xx

Fixed factory overhead is treated as a period expense.

Variable costing is used for internal management only. Its uses include: (1) inventory valuation and income determination; (2) relevant cost analysis; (3) Break-Even and Cost-Volume-Profit (CVP) Analyses; and (4) short-term decision-making. Variable costing is, however, not acceptable for external reporting or income tax reporting. Companies that use variable costing for internal reporting must convert to Absorption Costing for external reporting.

Under absorption costing, the cost to be inventoried includes all manufacturing costs, both variable and fixed. Nonmanufacturing (operating) expenses, i.e. selling and administrative expenses, are treated as period expenses and thus are charged against the current revenue.

Direct materials $xx

Direct labor xx

Variable factory overhead xx

Fixed factory overhead xx

Product cost $xx

Another important fact to note...

Effects of the two costing methods on net income: (a) When production exceeds sales, a larger net income will be reported under absorption costing. (b) When sales exceed production, a larger net income will be reported under direct costing. (c) When sales and production are equal, net income will be the same under both methods.