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.
Visualization of Variable Cost

Examples

Examples of variable costs are direct materials, direct labor, factory supplies, fuel, power, small tools, royalties, and freight.

Characteristics of Variable Costs

  1. Variable costs vary in total in direct proportion to volume
  2. Per unit variable cost remains fixed
  3. Variable costs can be assigned easily and accurately to operating departments
  4. The heads of departments are responsible for controlling variable costs

Frequently Asked Questions

What are variable costs?

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.

What is a typical example of a variable cost?

A percentage royalty paid on product sold is an example of a variable cost. The more product sold, the greater the royalty payment.

What are the major characteristics of variable costs?

Variable costs vary in total but remain roughly constant per unit. The ratio between the units produced and the units purchased remains roughly constant.

Why are variable costs important to managers?

Managers need to know how to control variable costs in order to maximize profits. They can be assigned easily and accurately to operating departments. Department heads are responsible for controlling them.

What is the difference between fixed costs and variable costs?

Fixed costs remain constant in total, whereas variable costs change with changes in production volume or activity. The unit cost of a variable cost remains fixed throughout the relevant range of activity.

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True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.