Variable Costing: A costing method that includes only variable manufacturing costs-direct materials, direct
labour, and variable manufacturing overhead-in the cost of a unit of product.
Fixed manufacturing overhead is not treated as a product cost under this method. Rather, is treated as period
cost and is expensed against revenue.
Variable costing is also referred as direct costing or marginal costing.
Fixed manufacturing overhead cost deferred in inventory: The portion of the fixed manufacturing overhead
cost of a period that goes into inventory under the absorption costing method as a result of production
Fixed manufacturing overhead cost released from inventory: The portion of the fixed manufacturing
overhead cost of a prior period that becomes an expense of the current period under the absorption costing
method as a result of sales exceeding production.
Change in production has no effect on operating income when variable costing is used but it effect the
operating income when the absorption costing is used.
Under variable costing, revenue essentially drives operating income. Under absorption costing, both
revenue and production drive operating income. The two drivers create confusion for the user of
operating income becaus