Variable expense

A variable expense is a cost that alters in conjunction with some type of activity. For example, the direct materials expense increases as sales increase. Other variable expenses are commissions, billable labor, piece rate labor, and credit card fees. A business has few truly variable expenses. Many other expenses, such as rent expense, are fixed within a certain activity range.

A business that has a high proportion of variable expenses can usually generate a profit on a low sales level. The reason is that there are few fixed expenses to be paid for in each month.

When setting prices, one should ensure that at least the variable expenses are included in the price. That way, the business will not lose money when each unit of a product is sold.