What does "variable costing" include in product costs?

Variable costing includes only the variable costs associated with producing a product. This method focuses on the costs that change with the level of production, such as raw materials, direct labor, and variable manufacturing overhead. By excluding fixed costs from product costs, variable costing allows businesses to make decisions based on the contribution margin, which is the difference between sales revenue and variable costs. This approach is particularly useful for internal decision-making, as it highlights how costs behave with production levels and facilitates analysis of pricing strategies and overall profitability.

In contrast to variable costing, other costing methods like absorption costing would include both fixed and variable costs in product costs, making the understanding of product costs under variable costing distinct and oriented towards short-term operational insights. Moreover, excluding administrative expenses from product costs emphasizes that variable costing is strictly concerned with production-related costs and not overhead or administrative functions that are not directly tied to the manufacturing process.