Under the variable cost method, operating profit is recognized through contribution or profit and loss. What are the steps and formulas?

Variable cost method, also known as direct cost method and marginal costing, is the abbreviation of variable cost calculation method. It refers to a cost calculation model which takes cost behavior analysis as the premise, only variable production cost as the composition of product cost, fixed production cost and non-production cost as the period cost, and calculates the profit and loss according to the contribution profit and loss determination procedure.

Variable cost method is to divide the costs incurred in a certain period into variable costs and fixed costs according to their cost characteristics, that is, variable production costs (that is, direct materials, direct labor and variable manufacturing costs) and fixed production costs (fixed manufacturing costs), and then take all fixed production costs and non-production costs (period costs) as period costs. Under the variable cost method, the variable production cost is only borne by the finished products sold, the finished products in stock and the products among them. Therefore, the inventory valuation of products in process and finished products under variable cost method is necessarily lower than that under absorption costing.

Under the variable cost method, operating profit and loss can only be measured according to the procedure of determining profit and loss according to contribution. The main formula is: operating income-variable cost = marginal contribution-fixed cost = operating profit, and the income statement format adopts contribution income statement; Under the absorption cost method, operating profit and loss must be measured according to the traditional profit and loss determination procedure. The main formula is: operating income-operating cost = operating gross profit-operating expenses = operating profit, and the income statement format adopts the traditional income statement.

Tips: The above information is for reference only.

Reply time: 2021-11-02. Please refer to the latest business changes announced by Ping An Bank in official website.