Variable costing

Under this method, manufacturing overhead is incurred in the period that a product is produced.

This artificially inflates profits in the period of production by incurring less cost than would be incurred under a variable costing system.

[1] Variable costing is generally not used for external reporting purposes.

Under the Tax Reform Act of 1986, income statements must use absorption costing to comply with GAAP.

Variable costing is a costing method that includes only variable manufacturing costs—direct materials, direct labor, and variable manufacturing overhead—in unit product costs.