Variable Cost

It is important for an organization to understand nature of cost to calculate how much it is spending on production. Cost can be either variable cost or fixed cost based on its nature. Unlike fixed costs, variable costs are directly related to sales volume. That means, the variable expense increases or decreases in the same proportion to the quantity of the output. 

What is Variable Cost?

There are various types of costs that an organization needs to incur for production such as variable costs, fix costs, and semi-variable costs. Unlike fixed costs, variable costs are dependent on the production or output of goods or services. Fix costs often relate to time period , and generally do not change over time.

Variable costs associated with the production of goods or services include direct material, wages and other operating expenses.

Semi-variable costs have components some that are fix and some that are variable. These costs are partly fix up to a level of production and then increase with the production volume. Most common examples of Semi-variable costs are electricity and wages for sales force.

Like electricity costs are fix up to a certain number of units of consumption. The cost increases with the next set of units consumed and tends to increase after the level fixed. Also, a portion of wage for a salesperson may be a fixed salary and the rest may be sales commission.

Examples of variable cost

  • Direct Materials – the raw materials used in production of product
  • Production Supplies – the supplies that are necessary for the machinery that help produce the product, such as supplies that help maintain equipments.
  • Sales Commissions – the part of a worker’s salary based on the sales they do.
  • Credit Card Fees – the fees that the merchant has to pay in order to offer credit card services to their customers

Other examples of variable costs are delivery charges, shipping charges, salaries,​ and wages. Performance bonuses to employees are also variable costs.  In many instances, reducing variable costs are easier to manage without major disruptions than changing fixed costs. 

Conclusion

Variable costs are not only a major part of running a business, they also can be key to turning breaking-even into profits. Or existing profits into larger profits. Also, it is easier to recover the variable costs from sales.

Keeping track of variable costs can provide crucial insight into where cash outflow is going and to what extent. The profits of a business directly inflate by adjusting the variable costs but maintaining sales prices.

FAQs

What are three examples of variable expenses?

Common variable costs for businesses include:
– Raw materials
– Packaging
– Shipping
– Labour
– Commission
– Credit card fees

Is salary a variable cost?

Annual salaries are fix costs but other types of compensation, such as commissions or overtime, are variable costs.

What is fix cost and variable cost with example?

Fix costs relate to a particular period i.e. they remain constant for a period of time. Variable costs are volume-related and change with the changes in output level. Examples. Depreciation, interest paid on capital, rent, salary, property taxes, insurance premium, etc.

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