Activity 1- Research the topic on variable costing.

VARIABLE COSTING
 Variable costing is a methodology that only assigns
variable costs to inventory. This approach means that all
overhead costs are charged to expense in the period incurred,
while direct materials and variable overhead costs are
assigned to inventory. There are no uses for variable costing
in financial reporting, since the accounting frameworks (such
as GAAP and IFRS) require that overhead also be allocated to
inventory. Consequently, this methodology is only used for
internal reporting purposes. However, it is quite commonly
used in this role, where variable costs are used to:
 Conduct breakeven analysis to determine the sales
level at which a business earns a zero profit.
 Establish the lowest possible price at which a product
can be sold.
 Formulate internal financial statements into a
contribution margin format (which must be adjusted before they
can be issued to outside parties).

 When variable costing is used, the gross margin

reported from a revenue-generating transaction is higher than
under an absorption costing system, since no overhead
allocation is charged to the sale. Though this does mean that
the reported gross margin is higher, it does not mean that net
profits are higher - the overhead is charged to expense lower
in the income statement instead. However, this is only the
case when the level of production matches sales. If production
exceeds sales, absorption costing will result in a higher
level of profitability, since some of the allocated overhead
will reside in the inventory asset, rather than being charged
to expense in the period. The reverse situation occurs when
sales exceed production.

 Under variable costing, the cost of production will be

as follows: Cost of production = Direct Materials + Direct
labor + Direct Expense + Variable Factory Overhead.