ABSTRACT
Direct costing is sometimes referred to as variable costing because it applies only the variable portion of production costs to the product costs. This costing method will give an executive a better understanding of how costs behave by segmenting costs into both variable and fixed and by providing a product contribution for each product. With direct costing, profits by product will vary because of the timing of the charging of fixed factory overhead to the statement of income. Direct costing represents an excellent tool for showing how certain decisions will affect the overall profitability of a company and return on investment. The basic difference between the methods is how the fixed manufacturing overhead is recorded in the evaluation of inventory. An understanding of the differences between fixed and variable costs is a much needed tool for any company. It will assist in making many managerial decisions needed to operate the business.
