VARIABLE COST is a cost that changes in relation to variations in an activity. In a
business, the "activity" is frequently production volume, with sales volume being another
likely triggering event. Thus, the materials used as the components in a product are
considered variable costs, because they vary directly with the number of units of product
manufactured.
Here are a number of examples of variable costs, all in a production setting:
Examples of Variable Explanations
Cost
The most purely variable cost of all, these are the raw
Direct materials
materials that go into a product
This is the amount paid to workers for every unit completed
(note: direct labor is frequently not a variable cost, since a
Piece rate labor
minimum number of people are needed to staff the
production area; this makes it a fixed cost)
Things like machinery oil are consumed based on the
Production supplies amount of machinery usage, so these costs vary with
production volume.
If a company bills out the time of its employees, and those
employees are only paid if they work billable hours, then
Billable staff wages this is a variable cost. However, if they are paid salaries
(where they are paid no matter how many hours they work),
then this is a fixed cost.
Salespeople are paid a commission only if they sell products
Commissions
or services, so this is clearly a variable cost.
Fees are only charged to a business if it accepts credit card
purchases from customers. Only the credit card fees that are
Credit card fees
a percentage of sales (i.e., not the monthly fixed fee) should
be considered variable
A business incurs a shipping cost only when it sells and
Freight out ships out a product. Thus, freight out can be considered a
variable cost.
If we let x represent the number of units to break-even, we can use the following formula
adopted from the above formula (1)
Px=vx+FC
Where P is the unit Price
x is the number of units
v is the variable cost per units; and
FC is the total fixed cost
To solve for x:
Px-vx=FC
business, the "activity" is frequently production volume, with sales volume being another
likely triggering event. Thus, the materials used as the components in a product are
considered variable costs, because they vary directly with the number of units of product
manufactured.
Here are a number of examples of variable costs, all in a production setting:
Examples of Variable Explanations
Cost
The most purely variable cost of all, these are the raw
Direct materials
materials that go into a product
This is the amount paid to workers for every unit completed
(note: direct labor is frequently not a variable cost, since a
Piece rate labor
minimum number of people are needed to staff the
production area; this makes it a fixed cost)
Things like machinery oil are consumed based on the
Production supplies amount of machinery usage, so these costs vary with
production volume.
If a company bills out the time of its employees, and those
employees are only paid if they work billable hours, then
Billable staff wages this is a variable cost. However, if they are paid salaries
(where they are paid no matter how many hours they work),
then this is a fixed cost.
Salespeople are paid a commission only if they sell products
Commissions
or services, so this is clearly a variable cost.
Fees are only charged to a business if it accepts credit card
purchases from customers. Only the credit card fees that are
Credit card fees
a percentage of sales (i.e., not the monthly fixed fee) should
be considered variable
A business incurs a shipping cost only when it sells and
Freight out ships out a product. Thus, freight out can be considered a
variable cost.
If we let x represent the number of units to break-even, we can use the following formula
adopted from the above formula (1)
Px=vx+FC
Where P is the unit Price
x is the number of units
v is the variable cost per units; and
FC is the total fixed cost
To solve for x:
Px-vx=FC
