Variable administrative costs are not included as a product cost under either the variable or absorption methods.
Because only variable costs are included in the cost of the product under variable costing, the cost of a unit will not change as production levels change.
This is not done under variable costing.
Under variable costing, the profits that the company reports will fluctuate with the level of sales. When sales increase, reported profits will increase. When sales decrease, reported profits will decrease. With variable costing, manufacturing fixed costs are treated as period costs and are expensed as incurred instead of being capitalized in inventory. So cost of goods sold consists of variable costs only. Therefore, profits will increase by the amount of the unit contribution margin multiplied by any increase in units sold, and they will decrease by the amount of the unit contribution margin multiplied by any decrease in units sold.
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