Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 23

One of your acquaintances notes, “This whole subject of differential costing is easy; variable costs are the only costs that are relevant.” How would you respond?

Step 1 of 3

Variable cost:

Variable cost: This cost is based on the level of production. Total variable costs changes with the change in the number of units of production but variable cost per unit remains constant. It is directly proportional to the number of goods produced and sold. It is deducted from the sales to arrive at the contribution.

Example: Cost of direct material, Cost of direct labor etc.