Variable costs can be defined as expenses which keep changing in proportion to the activities of a business. Variable costs can be calculated as the sum of marginal costs over all units produced.
Variable costs form one of the essential components and an important management tool in calculation of total costs. Besides, all variable costs are direct costs (costs which can be easily associated with a particular cost object). Variable costs are, sometimes, also referred as unit-level costs for they vary with the number of units produced. Usually, these variable costs keep on Increasing at a constant rate in proportion to labor and capital.
Explanation of variable cost
An example is explained ahead to clarify the concept of variable cost. For instance, a business firm pays raw material for production. As and when the activity increases, the usage of raw material also increases thereby increasing the expenditure. It is, however, noteworthy that the changes in expenditure occur with almost no or little intervention by the management.
Explaining the concept further, a business firm will pay for maintenance fees and line rentals in every period irrespective of the quantity of power used. Besides, certain electrical equipments, like lighting or air conditioning, might be kept running even during low activity periods. These expenses might be included in fixed cost but if you go beyond this, the electricity will be used as required to run plant and machinery.
Some of the examples of variable cost include serviettes, operating costs, perishable foods, food items, utilities, wages, raw materials, packaging, and alike. The fuel for an airline is another good example of variable cost. The cost varies with the number of flights and duration of trips.
The variable cost can be calculated as:
Total Variable Cost = Total Quantity of Output * Variable Cost per Unit of Output
In managing a business, it is highly essential to understand the concept of variable cost as an essential concept. Moreover, it is also important to know the practical application of this concept. To wrap up, variable costs are considered as a direct function of production volume, increasing with expansion in production and falling with contractions in production.
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software
Most WantedFinancial Terms
- Most Important Financial Ratios
- Debt-to-Equity Ratio
- Financial Leverage
- Current Ratio
- Interest Coverage Ratio (ICR)
- Receivable Turnover Ratio
- Return On Capital Employed (ROCE)
- Accounts Payable Turnover Ratio
- Debt Service Coverage Ratio
- Solvency Ratio
Have 10 minutes to relax?Play our unique
Play The Game