How to Calculate Net Income Using Variable Costing

by Kirk Thomason; Updated September 26, 2017

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.

Step 1

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

Step 2

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

Step 3

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.

Step 4

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

Step 5

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

References

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

About the Author

Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.