Variable Costs: Definition
Variable costs are total costs that vary in direct proportion to changes in productive output or activity. Examples of common variable costs include direct materials, direct labor, and sales commissions.
Variable Costs: Explanation
Variable costs change with rises or falls in production. For example, if production increases, a variable cost may also increase, and vice versa. Variable costs vary in total but the unit cost remains fixed.
Variable costs assume that a linear relationship exists between cost and volume of activity. The diagram below illustrates this relationship. Thus, fixed costs are constant in total, whereas variable costs are constant per unit.
Examples of variable costs are direct materials, direct labor, factory supplies, fuel, power, small tools, royalties, and freight.
Characteristics of Variable Costs
- Variable costs vary in total in direct proportion to volume
- Per unit variable cost remains fixed
- Variable costs can be assigned easily and accurately to operating departments
- The heads of departments are responsible for controlling variable costs