Which component is excluded from the direct costing method?

The direct costing method, also known as variable costing or direct variable costing, focuses on the costs that vary directly with the level of production. Under this method, costs are categorized into variable costs and fixed costs.

Fixed costs, such as rent, salaries of administrative personnel, and depreciation on buildings and equipment, are not included in the product costs under the direct costing method. These costs remain the same regardless of the level of production and, therefore, are treated as a period expense. This approach contrasts with absorption costing, where both variable and fixed manufacturing costs are included in the cost of products.

In summary, the correct understanding is that the direct costing method excludes fixed costs from product costs, emphasizing the analysis of variable costs to help in decision-making processes related to production and pricing. This method aids managers by providing clear visibility into how changes in production levels affect just the variable costs, thereby enhancing operational efficiency and decision-making.