Variable cost

Key Takeaways:

  • Variable cost refers to costs associated with the production levels of goods/services
  • Examples of variable costs are cost of raw material, cost of direct labour, commission given to employees, utility cost, etc

While Variable cost varies with the number of units produced, fixed cost doesn’t vary with production levels and remain constant

What is a Variable Cost?

A variable cost is the accounting name given to costs associated with the production of goods/services, which may rise or fall depending on the volume of production. Variable costs include the cost of raw materials, labour which change depending on the amount produced, be it goods or services. Apart from variable costs, there is another kind of cost involved in an enterprise — fixed cost — which remains the same no matter the magnitude of production such as overheads including any rent paid for premises.

How to calculate Variable Cost?

Total variable cost can be calculated using the formula:

Total Variable Cost = Total number of units produced * Variable cost per unit

Let’s take an example to understand this calculation better. The table below shows changes in variable cost with increase in the number of pizzas produced:

 1 pizza2 pizzas5 pizzas10 pizzas
Cost of ingredients$10$10*2 = $20$10*5 = $50$10*10 = $100
Direct labour cost$15$15*2 = $30$15*5 = $75$15*10 = $150
Total Variable Cost$25$50$125$250

As we can see that with the increase in the number of pizzas produced, total variable cost also increases.

Examples of Variable Costs

Examples of variable costs include:

·       Cost of raw material

·       Cost of direct labour

·       Commission given to employees

·       Production Supplies

·       Utility cost

·       Credit Card fees and other costs that vary with level of production output.

Difference between Variable Cost and Fixed Cost

Variable cost and fixed cost together constitute the total expenses of a business. While Variable cost varies with the number of units produced, fixed cost doesn’t vary with production levels and remains constant. A firm has to incur fixed cost whether it is making sales or not. Examples of fixed costs are rent, office supplies, salaries given to employees, etc. Whether sales happen or not, the company has to pay the rent.

Know More

Apart from fixed cost and variable cost, there is a third category that lies in between known as semi variable cost. Semi variable cost has both variable and fixed components. For semi variable costs, costs are fixed till a certain level of production after which it becomes variable.