Variable cost

Definition

Variable cost is a cost that varies directly with the level of production or business activity. Unlike fixed costs, variable costs change as the volume of output changes.

5 Must Know Facts For Your Next Test

1. Variable costs include direct materials, direct labor, and other expenses that increase with production levels.
2. Examples of variable costs are raw materials, packaging, and shipping fees.
3. Variable costs are essential for calculating the total cost of production and breakeven analysis.
4. The formula for total variable cost is Total Variable Cost = Variable Cost per Unit x Number of Units Produced.
5. In managerial accounting, understanding variable costs helps in budgeting and forecasting future expenses.

Review Questions

• What is the primary characteristic that distinguishes a variable cost from a fixed cost?
• Give three examples of common variable costs in manufacturing.
• How do variable costs impact breakeven analysis?

Related terms

Fixed Cost: A cost that remains constant regardless of the level of production or sales volume.

Contribution Margin:

The amount remaining from sales revenue after all variable expenses have been deducted.

Break-even Point: The production level at which total revenues equal total expenses, resulting in no profit or loss.