Determining “net income under variable costing” entails identifying a company’s profit after factoring in relevant variable costs, such as materials, labor, and utilities. Take a manufacturing firm that generates $100,000 in sales. To produce the goods, they incur variable costs of $50,000, leaving $50,000 as their net income under variable costing.
Since variable costs fluctuate with production levels, this method provides insights into the relationship between costs and income. It helps with decision-making, performance evaluation, and profitability analysis. Historically, variable costing emerged as an alternative to absorption costing, leading to increased transparency and flexibility in financial reporting.