What is a variable cost?


Quick Answer

A variable cost is money that a company spends in direct proportion with its production output. As production goes up, so do the variable costs. If production drops, the variable costs drop as well. These differ from such fixed costs as advertising, rent, office supplies and insurance, which generally stay set no matter what the output level. Adding fixed and variable costs reveals the total costs for a business.

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Full Answer

Variable costs include direct costs for materials or labor that are necessary to bring a particular project to completion. For example, the process of packaging and shipping a product involves a variable cost. The more of the product the company sells, the more the costs increase.

The cost of goods sold, delivery charges, wages, sales commissions and other costs associated with specific projects all go into variable costs. There are some other costs that are partially fixed and partially variable. Wages for a sales force are one example, particularly if a company pays a hybrid salary and commission structure. When apportioning costs, it is important to assigned the fixed and variable portions of your costs to those separate cost centers. Monitoring both fixed and variable costs is important for maintaining overall profitability.

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