What is Variable Costing?
Variable costing is a method of product costing in which only variable manufacturing costs — direct materials, direct labour, and variable overhead — are assigned to products. Fixed manufacturing overhead is treated as a period expense.
How It Works
- Classify each cost as variable or fixed in relation to output.
- Assign all variable manufacturing costs to inventory.
- Expense all fixed manufacturing overhead in the period incurred.
- Compute contribution margin = revenue − variable costs.
- Use contribution margin and break-even analysis for internal decisions.
Saudi Context
Saudi entities reporting externally under IFRS as adopted by SOCPA must use absorption costing for the financial statements. Variable costing is permitted only for internal management reporting and breakeven analysis.
Example
Variable manufacturing cost per unit = SAR 30. Fixed manufacturing overhead = SAR 200,000 expensed in the period. If 10,000 units are produced and 8,000 sold, ending inventory = 2,000 × 30 = SAR 60,000 (no fixed overhead).