Variable Costs Definition and Examples
Variable Costs Definition – “Costs that vary according to sales volume, such as the cost of materials and sales commissions”.
In simple words, costs that varies with the change in output are known as variable costs. They have the direct relationship with production or output. If output increases, it also increases and vice versa. Some of the example of such costs are –
- Direct materials, it involves the raw material used for the production of the goods and services.
- Daily wages involves wages paid to the labors hired on hourly basis.
- Packaging expenses that are part of production process.
Variable costs per unit means the cost that incurs while producing a single unit of a product or service. Say, the cost of manufacturing 30 pens is Rs 60. Now the variable cost per unit will be 60/30 equals to Rs. 2.
Variable Cost Formula
VC or Variable costs = Quantity of output × Variable cost per unit of output
Variable Costs Example
To understand the variable costs definition more deeply let’s discuss an example. Let’s assume XYZ company received an order of 3000 notebooks for a total price of Rs.10,000. Now the company wants to determine the gross profit.
Notebooks produced annually = Rs. 20,000
Costs of raw material = Rs. 10,000
Direct labor cost = Rs. 15,000
From the above information, the price of a notebook is 10,000/20,000 = 50 paise for raw materials and 15,000/20,000 = 75 paise
Variable cost = 3,000 × (0.5+0.75)
Gross profit = 10,000 – 3,750
Importance of Variable Costs
Variable costs play a very vital role in the business to business transactions. In B2B seller either increase or decrease the price to maximize his/ her profit. And variable cost is very important for determining the profit.
Profit = Quantity × (Price – variable cost).
Secondly, when customer buys at the same price, variable cost determine the profit margin. For example A business is offering pack of 6 pieces of jeans @ 5,000. At the same time B company is also offering @ 5,000. How you can say where is profit margin is high. It depends upon the variable cost incur in producing these jeans. Say, A and B firm incur 3,000 and 3,500 of variable cost respectively. The profit is high for A organisation.