Variable Costing


absorption costing

expensing method where both variable manufacturing expenses and fixed manufacturing expenses are considered as inventory expenses. It is used to show inventory valuation that is reported on the balance sheet.

break-even point

point at which a company's total revenue is equal to its total cost, which means zero profit and zero loss


products that are used together but are sold separately, each in turn creating a demand for the other

contribution margin

amount left after a company's total variable costs are subtracted from its total sales for a given period


gradual loss of an asset's value because of normal wear and tear over time

direct fixed cost

unchanging expense that is linked to a specific segment and that does not vary with activity level

direct labor

hours spent producing a product or providing a service that can easily be traced to the product or service

direct materials

raw goods that can be traced directly to, or easily identified with, a specific product

fixed cost

expense related to operating a company for a specific period of time that remains unchanged despite any change in the company's activity level

generally accepted accounting principles (GAAP)

rules and standards adopted by the Securities and Exchange Commission that companies must follow when reporting financial information

income statement

one of the four major financial statements; it measures revenues minus expenses to arrive at the net income or net loss during a specific time period

indirect fixed cost

unchanging expense that is not directly linked to a specific segment and that does not vary with activity level

inventory cost

expense that a company incurs for carrying a stock of goods, such as warehousing and depreciation

manufacturing costs

sum of all expenses a company incurs when turning raw materials into its finished products


part of a company, usually a product that it sells in addition to other products and services

segment margin

company's net loss or net profit in relation to the specific product or department analyzed within the segmented income statement

segmented income statement

financial document that breaks down the sales, cost allocation, and income as they relate to specific products or services that the company creates

throughput costing

method in which only direct materials are considered inventory costs and other manufacturing costs are expensed as period costs when they are incurred

variable cost

expense that increases or decreases with the level of production

variable costing

method in which all fluctuating expenses from manufacturing are considered to be part of inventory expenses

variable overhead

indirect costs as a result of manufacturing a product. These costs fluctuate based on how many units a company produces.