Definition of Variable Cost

by Investing School on March 22, 2010

Variable costs are an inevitable part of any business. They are expenses that will go up or down according to the activity of the business. It is also sometimes called “normal costs”. Variable costs coupled with fixed costs make up the two aspects of total cost. Direct costs are costs that can be easily attributed to a particular cost object. Variable costs are even sometimes referred to as unit-level costs because they will vary with the number of units produced.

For examples of this, you can turn to companies that are in the manufacturing business. When production is down for a particular product or item then there are fewer raw materials that are used and therefore less money is spent on the raw materials. However, when business is good then activity will increase and there will be more need for raw materials. Therefore, spending on raw materials will rise to meet the demand in production.

And, the manufacturing company will spend money on line rental and maintenance fees for each period regardless of how much power is used. These are regarded as fixed expenses. However, the electricity that is used due to increased production would be considered a variable cost because the busier the business the more electricity is needed.

For retail, when business spend money on the cost of goods it is almost always a variable cost. This is converse to manufacturing where you will have a mixture of fixed and variable costs.

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{ 1 comment… read it below or add one }

muhammad April 1, 2011 at 4:15 pm

I would like to know about the marketing strategies?


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