Variable costing
Variable costing assigns to each unit only its variable manufacturing costs: direct materials, direct labour, and variable overhead.
Also known asdirect costing · marginal costing
FrameworkVariable costing
See it move
A side-by-side comparison shows variable costing against absorption costing. Under variable costing, the unit product cost is €10 and the full €40,000 of fixed overhead is expensed in the period; under absorption costing, the unit cost rises to €15 by including €5 of fixed overhead per unit, so 2,000 unsold units defer €10,000 of fixed overhead onto the balance sheet. When production exceeds sales, absorption costing reports profit that is €10,000 higher — the difference sits in ending inventory and reaches the income statement only when those units are sold.
The formula
Variables
- Direct materials cost per unit (€ per unit)
- Direct labour cost per unit (€ per unit)
- Variable manufacturing overhead per unit (€ per unit)
Fixed manufacturing overhead is excluded from unit cost entirely and charged as a period expense in full; this is the key contrast with absorption costing.
Check yourself
Under variable costing, a factory incurs €60,000 in fixed manufacturing overhead. It produces 10,000 units but sells only 8,000 units during the period. How is the fixed overhead treated in the income statement?
If you trained under a national GAAP
DE · HGBWhere national-GAAP intuition diverges from the international standard
HGB (German)
HGB §255(2) requires inventory cost to include at least direct materials and direct labour, but grants entities an explicit choice (Wahlrecht) over whether to include fixed production overheads in inventory or expense them as incurred. Entities that choose to exclude fixed overhead from inventory produce results economically equivalent to variable costing, with fixed manufacturing costs charged in full to the period's income statement regardless of production volume.
IFRS
IAS 2 requires that inventory cost include a systematic allocation of fixed production overheads based on the normal capacity of the production facility. Pure variable costing — where all fixed manufacturing overhead is treated as a period cost — is not permitted for external financial reporting under IFRS. A company switching from an HGB policy of expensing fixed overhead immediately would recognise higher inventory values under IFRS and defer those costs into cost of goods sold only as units are sold.