calculate operating income under variable costing
Revenuesvariable cogsvariable marketing costs Contribution margin Fixed manufacturing costsFixed marketing costsOperating income
To calculate operating income under variable costing, follow these steps:
1. Determine total variable costs: This includes all costs that vary with the level of production or sales. Examples include direct materials and labor, variable overhead costs, and variable selling and administrative expenses.
2. Determine total fixed costs: This includes all costs that remain the same regardless of the level of production or sales. Examples include rent, insurance, depreciation, and salaries of fixed employees.
3. Deduct total variable costs from revenue: This gives you the contribution margin, the amount of revenue that goes towards covering fixed costs and generating profits.
4. Deduct total fixed costs from the contribution margin: This gives you the operating income under variable costing.
The formula for operating income using variable costing is:
Operating Income = Revenue – Variable Costs – Fixed Costs.
By subtracting the variable costs, only the fixed costs that will remain regardless of production will be deducted, giving a more accurate picture of the company’s profitability.
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