Variable costs are expenses that change in proportion to the volume of goods or services that a business produces. If your business creates more goods or provides more service, the variable costs increase. Conversely, if production levels fall, so do variable costs. Examples of variable costs can include raw materials, direct labor, and credit card transaction fees. They directly contrast fixed costs, which stay the same regardless of output levels.
1. What is an example of a variable cost?
One common example of a variable cost is the cost of raw materials. If a T-shirt manufacturer produces more shirts, the cost of the fabric, ink and other materials will increase in line with the production level, making these expenses variable costs.
2. How does variable cost affect profit?
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Variable cost affects profit directly. As the production of goods or services increases, so do the variable costs. If the selling price of the product doesn’t cover the variable cost per unit, the business will not make a profit. Therefore, understanding your variable costs can help maintain profitability.
3. How is variable cost calculated?
You can calculate the total variable cost of production by multiplying the variable cost per unit of input by the total quantity of output. It’s also important to note that variable costs are typically consistent per unit, but will fluctify in total with volume.
4. Can a variable cost become a fixed cost?
Technically, no. Variable costs and fixed costs are distinct in nature. However, within a certain range of output, a variable cost can act like a fixed cost. For example, a business may negotiate a deal for raw materials where the cost is fixed for a certain volume range. Beyond that range, the cost becomes variable again.
5. What is the difference between variable cost and fixed cost?
Variable costs are costs that change in proportion to the volume of goods or services produced by a business, whereas fixed costs remain constant regardless of the business’s output level. Examples of fixed costs might include rent for business premises or salaries for administrative personnel.