Which costing method includes only the variable costs directly incurred in production?

Variable costing, also known as direct costing or marginal costing, includes only the variable costs that are directly incurred in the production of goods. This method accounts for costs such as direct materials and direct labor, along with variable manufacturing overheads, while excluding fixed manufacturing costs from the product cost. By focusing solely on these variable costs, variable costing allows businesses to calculate the contribution margin, which is the difference between sales revenue and variable costs, providing valuable insights for decision-making regarding pricing, profitability, and cost control.

This approach contrasts with other costing methods like absorption costing, which incorporates both variable and fixed manufacturing costs into product costs, thus offering a different perspective on profitability and inventory valuation. In standard costing, predetermined costs are used for planning and control, and activity-based costing allocates costs based on activities that drive costs, making them distinct from the straightforward focus of variable costing.