Variable cost is the expense that fluctuates in proportion to the activity generated by a company or, in other words, that which depends on the variations that affect its turnover.
It may be the case that if an organization is dedicated to the production of wine – a winery – it will need a good grape harvest as raw material so that if it increases its activity rates, it will require a greater amount of product and, as a consequence , you will also see your variable costs increased. As can be seen in the graph, with production increases -volume- there are variable cost increases.
Other examples of this type of expense can be specified with income taxes (which fluctuate depending on the latter) or with commissions related to the sale of goods or services (which will also vary depending on the good in question).
Variable cost types
As its own nature indicates, variable costs change based on the number of units produced in an organization, in relation to its turnover. For this reason, it can be classified into three different categories:
- Proportional variable cost:It corresponds to the one that varies in the same proportion as the level of production of the entity; also, the unit variable cost remains constant.
- Progressive variable cost:It is related to the one that changes more than proportionally before variations in the level of production; On the other hand, the unit variable cost is increasing.
- Degressive variable cost:Defines the one that fluctuates less than proportionally to variations in the level of production. The unit variable cost is decreasing.
Variable cost characteristics
The characteristics of the variable cost are:
- If the production of items, goods or services is canceled, the variable costs disappear.
- The amount of variable costs will tend to be proportional to the amount of goods produced.
- Variable costs do not depend on time but, as has already been stressed, on the company’s turnover.
- This type of expense can be controlled and managed in the short term.
- It is regulated and classified by the administration department of the entity.
In short, variable cost can help verify the economic results of an organization by offering accurate information on the business behavior: if the production activity increases, this type of expense will also increase and, vice versa, if it decreases or falls, The variable cost will respond similarly.