What is Super-Variable Costing?

Super-variable costing only considers totally variable costs to be part of the cost of inventory. All other costs are charged to expense in the period incurred. This typically means that only direct materials are included in the cost of inventory. The result of this approach is that nearly all costs of production are charged to expense at once, resulting in lower reported profits in the short term.

Super-variable costing is only usable for internal reporting purposes, since it is not allowed under GAAP or IFRS. For external reporting purposes, factory overhead must also be allocated to the cost of inventory (which is called absorption costing). Because of this issue, super-variable costing has seen limited application.

When to Use Super-Variable Costing

Here are several scenarios in which it may make sense to use super-variable costing:

Short-term decision-making. Super-variable costing is useful when businesses need to analyze the short-term profitability of a product or service. Since it only considers totally variable costs, it helps managers determine whether selling additional units will contribute to covering fixed costs and generating profit.
Break-even and contribution margin analysis. Businesses can use super-variable costing to focus on contribution margin, which is the revenue remaining after deducting only variable costs. This method is beneficial for break-even analysis, as it clearly shows how many units must be sold to cover fixed expenses.
Pricing decisions for special orders. When evaluating one-time special orders or bulk discounts, super-variable costing helps determine if accepting the order will at least cover direct costs. It ignores fixed costs, which are already incurred, ensuring that decisions are based solely on relevant costs.
Performance evaluation of sales and production teams. Since super-variable costing highlights how efficiently variable costs are managed, it is useful for assessing sales and production team performance. It helps identify whether cost fluctuations are due to operational inefficiencies rather than changes in fixed costs.
Highly variable cost environments. Industries with highly variable costs, such as retail or food service, may use super-variable costing to better track cost behavior. By focusing only on truly variable expenses, businesses can make more informed decisions about inventory management and pricing strategies.