Variable Costs

Expenses that vary based on the amount of goods and services produced

Author: Vanshika Nakul
Vanshika Nakul
Vanshika Nakul

My name is Vanshika Nakul, pursuing an MSc in Finance, Investment, and Risk at the University of Kent. I have been graduated with a first-class degree in BSc Accounting and Finance from the University of East London.

A young enthusiastic learner who always wants to gain relevant experience and knowledge from exploring different opportunities and experiences. I am a proactive, extrovert and dedicated person. I am confident with strong opinions and possess interpersonal skills like critical thinking, emotional intelligence, speaking confidently, compassionate being an active listener, self-awareness, and social awareness. I am always open to new opportunities and exploring new experiences that will enhance my growth in a real working environment. By nature, I possess two qualities or characteristics which makes me stand out are big-picture thinker and being calm under pressure.

Reviewed By: James Fazeli-Sinaki
James Fazeli-Sinaki
James Fazeli-Sinaki
Last Updated:February 21, 2024

What Is A Variable Cost?

Variable costs are the expenses that a business incurs and that vary based on the amount of goods and services it produces. These costs are also known as unit-level costs.

It is the opposite of a fixed cost, which remains constant regardless of a change in production volume. Variable and fixed costs sum to total costs, which implies:

Total costs = Fixed costs + Variable costs

The formula can be represented in 2 ways:

 1. Total variable costs (TVC):

TVC = Total Quantity of Output * VC Per Unit of Output

 2. Average variable costs (AVC):

AVC = Sum of Total Variable Costs of All Products / Total Number of Units Produced. 

These can be explained as the costs that decrease with a fall in the production of goods and services and increase with a rise in the production volume of goods and services. 

Hence, it is said to be directly proportional to the change in production volume. These costs are generally short-term and may be quickly adjusted. They are considered essential for decision-making. 

As profits rely on their sales' success, businesses with a large share of variable costs compared to fixed costs are often thought to be less volatile. A few examples include:

  • Commissions and fees
  • Packaging 
  • Delivery costs
  • Billable staff or labor wages

Key Takeaways

  • Variable Costs are expenses that fluctuate with changes in the volume of goods or services produced. They contrast with fixed costs and are essential for decision-making as they directly impact a company's profitability.
  • Total Costs are composed of Fixed Costs and Variable Costs: Total Costs = Fixed Costs + Variable Costs. Variable Costs can be calculated through Total Variable Costs (TVC) or Average Variable Costs (AVC) formulas.
  • Variable Costs differ from Fixed Costs in nature, duration, and occurrence. Fixed Costs remain consistent over time regardless of production changes, while Variable Costs vary in line with output fluctuations.

Understanding Variable Costs

Variable cost is known as the start-up cost because the costs are likely to change with changes in the company's production line. These costs can be budgeted by separating expenses into fixed or variable to analyze and budget the expenses accordingly.

Industries with a higher degree of variability will likely use more variable costs, like manufacturing and retail. Therefore, tax is considered a variable expense when analyzing costs for the company. 

 An increase in variable cost determines the production and sales of goods and services. This implies that these costs are directly linked to the company's production processes. 

Some ways to manage these costs are:

  1. Finding a financial product that has a fixed interest rate
  2. Negotiate for discounts
  3. Improvement in the production and sale of goods and services
  4. Apply business technology
  5. Analyze various variable costs
  6. Outsource labor at a lower cost
  7. Use social media to spread awareness 

The common variable costs needed to start a business are direct labor and raw materials. These items allow the business to operate and earn profits. The other name for this cost is unit-level cost.

These are "short-term costs," also known as prime or direct costs. There is no compulsion to pay these costs if there is no production. These are highly dependent on the volume of production of goods and services. 

Variable Costs vs. Fixed Costs

Total costs contain variable and fixed costs. These types of costs are opposites of each other. In the below table, we include some of the main differences between them:

Differences between Fixed Cost and Variable Cost

Basis Fixed Cost Variable Cost
Definition A cost that remains constant and does not change with a change in the volume of production of goods and services  A cost that changes with changes in the volume of production of goods and services 
Nature Dependent on time and may change after a certain period Dependent on volume and changes with changes in the volume of production 
Type  Long-term costs Short-term costs
Mandatory  Yes, it is mandatory to pay fixed costs even with no production taking place.  No, it is not a mandatory cost as, if there is no production, there are no variable costs. 
Incurs with  It is incurred even if the output of production is zero  Cost decreases or increases in line with output. 
Also known as  It is also known as overhead costs or period costs  It is also known as prime or direct costs 
Examples Rent, salaries, insurance, and loan repayments Raw material, direct labor, transportation, and delivery costs

It is important to distinguish between the two types of costs. This helps make business decisions and determine how changes in the level of output affect costs. 

These costs are used for costing the business' products using different methods, such as activity-based costing, process costing, etc. 

Examples of variable Cost

Below we explore some real-life examples for calculating variable costs:

1. Let's assume there are 150 strawberry packets, with the variable Cost as $0.40 per unit. Calculate the total variable costs (TVC).


The total quantity of output = 150

VC per unit = $0.40

TVC = total quantity of output * VC per unit 

= 150 * $0.40 = $60

⇒ The TVC for 150 strawberry packets is $60.

2. Assume the following and calculate the TVC and total costs:

  • Direct labor = $45
  • Raw materials = $55
  • Transportation costs = $35
  • Commission and fees = $25
  • Fixed costs = $200

► Answer:

TVC = direct labor + raw materials + transportation fees + commission and fees

= $45 + $55 + $35 + $25 = $160

Total cost = fixed cost + TVC

= $200 + $160 = $360

3. Let's consider both variable and fixed costs to make several slices of bread:



Quantity of slices of bread Variable costs Fixed costs Total costs
0 - $200 $200
2 $10 $200 $210
4 $20 $200 $220
6 $30 $200 $230

As shown in the above table, the variable costs change with the quantity of bread while fixed costs remain constant, even when no production occurs.

Variable Costs FAQs

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