Variable Cost Definition
Variable Costs Definition
A variable cost is any corporate expense that changes along with changes in production volume.
While variable costs are generally thought of as physical items, such as raw materials, variable costs include all expenses which increase incrementally with each additional unit produced.
Sales commissions, for example, are also considered variable because the size of a commission is tied to the volume of products sold by an employee.
How to Find Variable Cost
Because Variable Costs are tied to production, they are usually thought of as a constant amount expensed per unit produced.
For example, if a lemonade manufacturer increases production from 100,000 bottles a week to 250,000, the cost per bottle remains the same, but the total variable cost increases proportionately to the increase in production volume.
To determine total variable cost, simply multiply the cost per unit with the number of units produced.
It’s worth mentioning that firms may reduce the cost per unit by benefiting from Economies of Scale, which allows for decreased variable costs due to increased efficiency and bargaining power from higher volume.
Variable costs stand in contrast with fixed costs since fixed costs do not change directly based on production volume.
Examples of fixed costs are employee wages, building costs, and insurance.
Between variable and fixed costs are semi-variable costs (also known as semi-fixed or mixed costs).
These costs have a mix of costs tied to each unit of production and a fixed cost which will be incurred regardless of production volume.
For example, the cost of deliveries includes the fixed costs of insurance, depreciation, and loan payments on a fleet of delivery vehicles, but the cost of gasoline is variable depending on the number of deliveries.
An increase in the number of deliveries being made will increase the expense of gasoline, but not the cost of the insurance, depreciation, or loans.