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Wednesday, November 3, 2010

Features Variable Costing System

A costing method that includes only variable manufacturing costs as inventoriable costs is known as variable costing system. It excludes all fixed manufacturing costs from inventoriable costs.

The main characteristics or features of variable costing system can be expressed as follows:

1. Cost Differentiation

Variable costing differentiates the manufacturing overheads into fixed and variable. The variable costs are treated as the product cost and fixed costs are treated as period cost.

2. No Difference In Unit Cost

Variable costing does not show differences in average unit cost of production with the fluctuation of output.

3. Decrease In Cost Of Production

Unit cost of production decreases with increase in output due to constant level of fixed cost.

4. Cost Separation

Separate of mixed cost into fixed and variable proportion.

5. Decision Making

Variable costing helps in decision making procedures providing necessary informations and data.

The fixed cost such as rent, depreciation, salary etc. are incurred even if there is no production. So, they are not considered product cost and are treated as period cost. Hence fixed costs are treated as expenses of the period. They are not transferable to next period as such they are not included in inventories.