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This video provides an example of how to calculate a company’s operating profit or loss when Variable Costing is used in Managerial Accounting.

To calculate operating profit or less with Variable Costing, you subtract operating expenses from operating revenues. However, fixed manufacturing overhead is treated as a period cost and is expensed immediately. This is a key distinction from Absorption Costing; under Absorption Costing, fixed manufacturing overhead is treated as a product cost and thus becomes attached to inventory.