Variable cost definition
/What is Variable Cost?
A variable cost is a cost that varies in relation to either production volume or the amount of services provided. If no production or services are provided, then there should be no variable costs. If production or services are increasing, then variable costs should also increase.
How to Calculate Total Variable Costs
To calculate total variable costs, multiply the total quantity of units produced by the variable cost per unit. The formula is:
Total quantity of units produced x Variable cost per unit = Total variable costs
The sum total of all manufacturing overhead costs and variable costs is the total cost of products manufactured or services provided.
Related AccountingTools Course
Types of Variable Costs
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. Credit card fees are also considered a variable cost, since they are only incurred if a sale is completed. Most types of overhead are not considered a variable cost.
Example of Variable Costs
An example of a variable cost is the resin used to create plastic products; resin is the key component of a plastic product, and so varies in direct proportion to the number of units manufactured. As another example, a business only incurs credit card fees when it sells products to customers that are paid for with a credit card; if there are no sales, then there are no credit card fees.
Advantages of Variable Costs
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. This can be a major advantage in industries that periodically suffer from sharp declines in sales.