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Information about Variable Cost

Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

Explanation

For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.

A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.

In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.

Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.

See also

In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. Mathematically, the marginal cost (MC) function is expressed as the derivative of the total cost (TC) function with respect to quantity (Q).
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Fixed costs are expenses whose total does not change in proportion to the activity of a business, within the relevant time period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales to be considered part of fixed costs, but
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In economics, total cost describes the total economic cost of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses for assets like buildings.
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In business, overhead, overhead cost or overhead expense refers to an ongoing expense of operating a business. The term overhead is usually used to group expenses that are necessary to the continued functioning of the business, but that do not directly generate
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Indirect costs are costs that are not directly accountable to a particular function or product; these are fixed costs. Indirect costs include taxes, administration, personnel and security costs.

See also

  • Operating cost

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Manufacturing (from Latin manu factura, "making by hand") is the use of tools and labor to make things for use or sale. The term may refer to a vast range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw
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cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost.
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Cost accounting is the process of tracking, recording and analyzing costs associated with the products or activities of an organization. Cost accounting does not follow generally accepted accounting principles, or GAAP. Costs are measured in units of currency by convention.
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In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms use these curves to find the optimal point of production, where they make the most profits.
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A Cost Driver is any activity that causes a cost to be incurred. The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred. In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output.
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Fixed costs are expenses whose total does not change in proportion to the activity of a business, within the relevant time period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales to be considered part of fixed costs, but
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