# Variable Cost Definition

## What Is a Variable Cost?

A variable cost is a corporate expense that changes in proportion to how much a company produces or sells. Variable costs increase or decrease depending on a company’s production or sales volume—they rise as production increases and fall as production decreases. Examples of variable costs include a manufacturing company’s costs of raw materials and packaging—or a retail company’s credit card transaction fees or shipping expenses, which rise or fall with sales. A variable cost can be contrasted with a fixed cost.

### Key Takeaways

• A variable cost is an expense that changes in proportion to production output or sales.
• When production or sales increase, variable costs increase; when production or sales decrease, variable costs decrease.
• Variable costs stand in contrast to fixed costs, which do not change in proportion to production or sales volume.

## Understanding a Variable Cost

The total expenses incurred by any business consist of variable and fixed costs. Variable costs are dependent on production output or sales. The variable cost of production is a constant amount per unit produced. As the volume of production and output increases, variable costs will also increase. Conversely, when fewer products are produced, the variable costs associated with production will consequently decrease.

Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs.

## How to Calculate Variable Costs

The total variable cost is simply the quantity of output multiplied by the variable cost per unit of output:

Total Variable Cost  =  Total Quantity of Output X Variable Cost Per Unit of Output

## Variable Costs vs. Fixed Costs

Fixed costs are expenses that remain the same regardless of production output. Whether a firm makes sales or not, it must pay its fixed costs, as these costs are independent of output.

Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A company must still pay its rent for the space it occupies to run its business operations irrespective of the volume of products manufactured and sold. If a business increased production or decreased production, rent will stay exactly the same. Although fixed costs can change over a period of time, the change will not be related to production, and as such, fixed costs are viewed as long-term costs.

There is also a category of costs that falls between fixed and variable costs, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. If no production occurs, a fixed cost is often still incurred.

## Example of a Variable Cost

Let’s assume that it costs a bakery $15 to make a cake—$5 for raw materials such as sugar, milk, and flour, and \$10 for the direct labor involved in making one cake. The table below shows how the variable costs change as the number of cakes baked vary.