What is a variable cost?
Variable costs, also known as variable expenses or variable expenditures, are costs that fluctuate with production output or sales volume. Variable costs can include direct materials such as raw materials used to make a product, labor associated with the production of goods and services, and commissions paid on sales of products and services.
How to calculate the total variable cost?
Total Variable Cost is determined by multiplying the total quantity of output and the variable cost Per Unit of Output. Total variable costs can be affected by certain sources, such as outsourcing or improvements in technology, which have the potential to decrease Total Variable Costs. To determine Total Variable Cost one must have a clear understanding of all variables that impact this cost.
Variable Cost Formula
Total Variable Cost = Total Quantity of Output X Variable Cost Per Unit of Output
Difference between Variable cost and Fixed cost
In contrast to fixed costs, which remain constant regardless of production or sales activity, variable cost increases when activity rises and decreases when activity falls. When businesses analyze their operations they need to understand the difference between fixed and variable costs as it can help them find ways to save money and improve efficiency.