Variable costs are expenses that vary in direct proportion to the level of production or business activity. In other words, they are costs that change with the quantity of goods or services a business produces. As production increases, variable costs also rise, and as production decreases, variable costs decrease.
Examples of variable costs:
- Raw materials: The cost of raw materials needed to manufacture products is a classic example of a variable cost.
- Labour: In some industries, especially those with a piece-rate payment system, labour costs are considered variable.
- Utilities: In many cases, the cost of utilities is tied to production levels. A factory using more energy to produce more goods is an example.
- Direct labour: For industries where labour costs are directly tied to production, the wages of production workers can be considered a variable cost.
- Sales commissions: In businesses where salespeople receive commissions based on the number of units sold, this is a variable cost.
Since variable costs are directly tied to production levels, they are often considered more controllable in the short term. This means that a business can adjust its production levels to manage variable costs.