How to Calculate Net Income Using Variable Costing

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Cost accounting provides a company with measurement and allocation techniques to compute a good’s production cost. Variable costing is one method a company may use to complete this process. Under variable costing principles, direct materials, direct labor and variable manufacturing overhead represent the product’s cost. Fixed manufacturing overhead costs are a part of a company’s period expenses listed on the income statement. Variable costing is not allowable under generally accepted accounting principles as it violates proper accounting procedures for period expenses.

Review manufacturing overhead costs from the production department. The costs should be on production reports for each good or batch of goods produced.

Separate variable manufacturing overhead from this amount. Variable overhead costs change with production output. Examples include utilities and delivery driver wages.

Write a list of fixed overhead expenses. Inclusions should be costs paid for rent, equipment depreciation, building security and production manager salaries, along with similar items.

List the fixed manufacturing overhead expenses on the income statement under the period expenses.

Calculate net income by subtracting the cost of goods sold and expenses from sales revenue. The difference represents net income for the current period.

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References

  • "Cost Management: Strategies for Business Decisions"; Ronald Hilton, et al.; 2006
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