Under variable costing, which manufacturing costs are treated as product costs?

• A. All manufacturing and non-manufacturing costs
• B. Only variable manufacturing costs
• C. Both variable and fixed manufacturing costs
• D. Only fixed manufacturing costs

Answer: (B)

Verified step by step guidance

1. Understand the concept of variable costing: Variable costing is a method of costing where only variable manufacturing costs are treated as product costs. Fixed manufacturing costs are considered period costs and are expensed in the period incurred.
2. Identify the types of manufacturing costs: Manufacturing costs include direct materials, direct labor, and manufacturing overhead. These can be further classified into variable costs (e.g., costs that change with production volume) and fixed costs (e.g., costs that remain constant regardless of production volume).
3. Focus on variable manufacturing costs: Under variable costing, only costs that vary directly with production, such as direct materials, direct labor, and variable manufacturing overhead, are treated as product costs.
4. Exclude fixed manufacturing costs: Fixed manufacturing costs, such as factory rent or salaries of production supervisors, are not included in product costs under variable costing. Instead, they are treated as period costs and expensed in the income statement during the period they are incurred.
5. Compare variable costing to absorption costing: In absorption costing, both variable and fixed manufacturing costs are treated as product costs. Understanding this distinction helps clarify why only variable manufacturing costs are considered product costs under variable costing.