What is a variable cost?

A variable cost is a cost that varies in relation to either production volume or services provided. If there is no production or no services are provided, then there should be no variable costs.

To calculate total variable costs, the formula is:

Total quantity of units produced x Variable cost per unit = Total variable cost

Direct materials are considered a variable cost. Direct labor may not be a variable cost if labor is not added to or subtracted from the production process as production volumes change. Most types of overhead are not considered a variable cost.

The sum total of all manufacturing overhead costs and variable costs is the total cost of products manufactured or services provided.

If a company has a large proportion of variable costs in its cost structure, then most of its expenses will vary in direct proportion to revenues, so it can weather a business downturn better than a company that has a high proportion of fixed costs.

An example of a variable cost is the resin used to create plastic products. The resin is the key component of a plastic product, and so varies in direct proportion to the number of units manufactured.