Variable Cost

Variable costs are expenses which vary in proportion to the volume of products or services generated by an enterprise. Depending on the amount of output of a business, variable costs increase or decrease; they rise as production rises and decline as production decreases. In other words, they’re costs that modify looking on the quantity of activity. The prices increase because the volume of activities increases and reduces because of the volume of activities decreases. Samples of variable costs include the prices of raw materials and packaging. It will be contrasted with a set cost.

The most Common Variable Costs are

  • Direct materials
  • Direct labor
  • Transaction fees
  • Commissions
  • Utility costs
  • Billable labor

Essentially, if a value varies looking on the amount of activity, it’s a variable cost. The whole expenses incurred by any business include fixed costs and variable costs. Fixed costs and variable costs frame the two components of the total cost. Direct costs are costs that may easily be related to a specific cost object. Variable costs are obsessed on production output. The variable cost of production could be a constant amount per unit produced. However, not all variable costs are direct costs. Because of the volume of production and output increases, variable costs also will increase.

The formula for Variable Costs:

Total Variable Cost = Total Quantity of Output x Variable Cost Per Unit of Output

In comparison, the variable costs associated with manufacturing will eventually decrease as less goods are made. There are several factors affecting the degree of variable cost, such as fixed cost, project length, complexity, and discount rate. These are usually seen as short-term costs because they can be easily modified. Throughout break-even analysis, variable costs play an integral part, and break-even analysis is used to calculate the amount of sales or the units needed to sell to offset the overall costs.

As a function of those factors, an analytical formula of the variable cost was derived. This can be used to determine how growing variables affect the variable cost and overall return on investment. Definitions of variable costs include sales fees, direct labor costs, raw material costs used in manufacturing, and service costs. The total variable cost is solely the amount of output multiplied by the variable cost per unit of output. If an organization encompasses 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 an organization that incorporates a high proportion of fixed costs.

 

Information Sources:

  1. investopedia.com
  2. corporatefinanceinstitute.com
  3. wikipedia