Financial Terms Variable costing

# Definition of Variable costing

## Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.

## variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns

# Related Terms:

## direct costing

see variable costing

## Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

## Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

## Endogenous variable

A value determined within the context of a model.

## Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.

## Normal random variable

A random variable that has a normal probability distribution.

## Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

## Variable

A value determined within the context of a model. Also called endogenous variable.

## Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.

## Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

## Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.

## Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

## Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.

## Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.

## Variable rate loan

Loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

## VARIABLE EXPENSES

Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

## Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.

## Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.

## Job costing

A method of accounting that accumulates the costs of a product/service that is produced either
customized to meet a customerâ€™s specification or in a batch of identical product/services.

## Lifecycle costing

An approach to costing that estimates and accumulates the costs of a product/service over
its entire lifecycle, i.e. from inception to abandonment.

## Process costing

A method of costing for continuous manufacture in which costs for an accounting compared are compared with production for the same period to determine a cost per unit produced.

## Semi-variable costs

Costs that have both fixed and variable components.

## Target costing

A method of costing that is concerned with managing whole-of-life costs of a product/service during the product design phase â€“ the difference between target price (to achieve market share) and the target profit margin.

## Variable cost

A cost that increases or decreases in proportion with increases or decreases in the volume of production of goods or services.

## activity based costing (ABC)

A relatively new method advocated for the
allocation of indirect costs. The key idea is to classify indirect costs,
many of which are fixed in amount for a period of time, into separate
activities and to develop a measure for each activity called a cost driver.
The products or other functions in the business that benefit from the
activity are allocated shares of the total indirect cost for the period based
on their usage as measured by the cost driver.

## variable expenses

Expenses that change with changes in either sales volume
or sales revenue, in contrast to fixed expenses that remain the same
over the short run and do not fluctuate in response to changes in sales
expenses.

## absorption costing

a cost accumulation and reporting
method that treats the costs of all manufacturing components
(direct material, direct labor, variable overhead, and
fixed overhead) as inventoriable or product costs; it is the
traditional approach to product costing; it must be used for
external financial statements and tax returns

## activity-based costing (ABC)

a process using multiple cost drivers to predict and allocate costs to products and services;
an accounting system collecting financial and operational
data on the basis of the underlying nature and extent
of business activities; an accounting information and
costing system that identifies the various activities performed
in an organization, collects costs on the basis of
the underlying nature and extent of those activities, and
assigns costs to products and services based on consumption
of those activities by the products and services

## attribute-based costing (ABC II)

an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute
enhancements that the company wants to integrate into a product

## backflush costing

a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances
from standard

## decision variable

an unknown item for which a linear programming
problem is being solved

## dependent variable

an unknown variable that is to be predicted
using one or more independent variables

## FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs

## full costing

see absorption costing

## hybrid costing system

a costing system combining characteristics
of both job order and process costing systems

## independent variable

a variable that, when changed, will
cause consistent, observable changes in another variable;
a variable used as the basis of predicting the value of a
dependent variable

## job order costing system

a system of product costing used
by an entity that provides limited quantities of products or
services unique to a customerâ€™s needs; focus of recordkeeping
is on individual jobs

## key variable

a critical factor that management believes will
be a direct cause of the achievement or nonachievement
of the organizational goals and objectives

## life cycle costing

the accumulation of costs for activities that
occur over the entire life cycle of a product from inception
to abandonment by the manufacturer and consumer

## modified FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per
equivalent unit but, in transferring units from a department,
the costs of the beginning inventory units and the
units started and completed are combined and averaged

## process costing system

a method of accumulating and assigning costs to units of production in companies producing large quantities of homogeneous products;
it accumulates costs by cost component in each production department and assigns costs to units using equivalent units of production

## relevant costing

a process that compares, to the extent possible
and practical, the incremental revenues and incremental costs of alternative decisions

## slack variable

a variable used in a linear programming problem
that represents the unused amount of a resource at
any level of operation; it is associated with less-than-orequal-
to constraints

## strict FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per equivalent unit and, in transferring units from a department, keeps the
cost of the beginning units separate from the cost of the
units started and completed during the current period

## surplus variable

a variable used in a linear programming problem that represents overachievement of a minimum requirement; it is associated with greater-than-or-equal-to constraints

## target costing

a method of determining what the cost of a
product should be based on the productâ€™s estimated selling
price less the desired profit

## variable cost

a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis

## variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

## weighted average method (of process costing)

the method of cost assignment that computes an average cost per
equivalent unit of production for all units completed during
the current period; it combines beginning inventory units
and costs with current production and costs, respectively,
to compute the average

## Absorption costing

A methodology under which all manufacturing costs are assigned
to products, while all non-manufacturing costs are expensed in the current period.

## Activity-based costing (ABC)

A cost allocation system that compiles costs and assigns
them to activities based on relevant activity drivers. The cost of these activities can
then be charged to products or customers to arrive at a much more relevant allocation
of costs than was previously the case.

## Direct costing

A costing methodology that only assigns direct labor and material costs
to a product, and which does not include any allocated indirect costs (which are all
charged off to the current period).

## First in, first-out costing method (FIFO)

A process costing methodology that assigns the earliest
cost of production and materials to those units being sold, while the latest costs
of production and materials are assigned to those units still retained in inventory.

## Kaizen costing

The process of continual cost reduction that occurs after a product
design has been completed and is now in production. Cost reduction techniques can
include working with suppliers to reduce the costs in their processes, implementing
less costly re-designs of the product, or reducing waste costs.

## Process costing

A costing methodology that arrives at an individual product cost through the calculation of average costs for large quantities of identical products.

## Variable cost

A cost that changes in amount in relation to changes in a related activity.
Variance
The difference between an actual measured result and a basis, such as a budgeted amount.

## variable costs

Costs that change as the level of output changes.

## Variable Annuity

A form of annuity policy under which the amount of each benefit is not guaranteed or specified. The amounts fluctuate according to the earnings of a separate investment account.