Variable cost is a type of cost that changes with the level of production or sales volume of a business. These costs are directly proportional to the quantity of goods or services produced or sold. Variable costs are often contrasted with fixed costs, which remain constant regardless of the level of production or sales.
Examples of variable costs include raw materials, direct labor, packaging materials, and shipping expenses. These costs will increase or decrease as production volume increases or decreases.
Formula for calculating variable cost: Variable cost can be calculated by multiplying the quantity of output by the variable cost per unit. The formula is:
Variable cost = Quantity of output x Variable cost per unit
For example, let’s say a company produces 1,000 units of a product and the variable cost per unit is $10. The variable cost for producing 1,000 units would be:
Variable cost = 1,000 x $10 = $10,000
As the company produces more units, the variable cost will increase, and as it produces fewer units, the variable cost will decrease. This makes variable cost an important consideration in determining the profitability of a business, as it directly impacts the cost of producing each unit of product or service.