Variable costs are company costs that can change proportionally depending on the production incurred. Variable costs can go up or down depending on the company’s production volume. Variable costs will increase when production increases and decreases when production also decreases, unlike fixed costs that are not dependent on the production process.
This variable cost can be calculated as the sum of the marginal costs ( m arginal cost ) of all units produced or costs directly related to the production of an item. Variable costs are also sometimes referred to as unit-level costs or level costs because these variable costs vary with the number of units produced.
Example of Variable Costs
- Direct Materials– Materials related to the direct production process or commonly referred to as raw materials. Direct material can change according to the number of products that have been produced.
- DirectLabor – Labor that directly plays a role in the production of goods. Labor will be paid when it has produced a product. Only temporary workers whose wages fall into variable costs.
- Meeting the Needs of Production Tools– Materials needed for the production process to run. Like oil for production machines, or electricity for engines.
- Labor Overtime Wages– The number of hours spent by labor overtime while working will be calculated as variable costs.
- Commissions– Commissions are calculated every time a product is sold for a certain amount, because it changes based on the amount of production and sales.