Effective variable-rate nitrogen (N) management requires an understanding of temporal variability and field-scale spatial interactions (e.g. lateral redistribution of nutrients). Modeling studies, in conjunction with field data, can improve process understanding of agricultural management. CropSyst-Microbasin (CS-MB) is a fully distributed, 3-dimensional hydrologic cropping systems model that simulates small (10 s of hectares) heterogeneous agricultural watersheds with complex terrain. This study used a highly instrumented 10.9 ha watershed in the Inland Pacific Northwest, USA, to: (1) assess the accuracy of CS-MB simulations of field-scale variability in water transport and crop yield in comparison to observed field data, and (2) quantify differences in simulated yield and farm profitability between variable-rate and uniform fertilizer applications in low, average and high precipitation treatments. During water years 2012 and 2013 (a “water year” refers to October 1st through the following September 30th, where a given water year is named for the calendar year on September 30th), the model simulated surface runoff with a Nash–Sutcliffe efficiency (NSE) of 0.7, periodic soil water content (comparison to seasonal soil core measurements) with a root mean square error (RMSE) ≤0.05 m3 m−3, and continuous soil water content (comparison to in situ soil sensors) at 15 of 20 microsites with NSE ≥0.4. The model predicted 2013 field variability in winter wheat yield with RMSE of 1100 kg ha−1. Simulated uniform N management resulted in 0–35 kg ha−1 greater field average yield in comparison to variable-rate management. The savings in fertilizer costs under variable-rate N management resulted in $23–$32 ha−1 greater field average returns to risk. This study demonstrated the capacity of CS-MB to further understanding of simulated and observed field-scale spatial variability and simulated crop response to low, medium and high annual precipitation.