Definition of Variable Cost
A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with the change in volume or activity.
Examples of Variable Costs
Generally, a product’s direct materials are a variable cost. For example, if a bakery uses one pound of flour for every loaf of bread it produces, the flour is a variable cost. If the flour costs $0.40 per pound and no bread is produced, the total cost of flour will be $0. If one loaf is produced, the total cost of flour will be $0.40. When 10 loaves are produced, the total cost of flour will be $4. If 50 loaves are produced, the cost of flour will be $20 (50 loaves X 1 pound X $0.40 per pound).
An expense can also be a variable cost. For instance, if a company pays a 5% sales commission on every sale, the company’s sales commission expense will be a variable cost. If the company has no sales, the total sales commission expense will be $0. When sales are $100,000 the sales commission expense will be $5,000. Sales of $200,000 will mean total sales commission expense of $10,000. Sales of $400,000 will result in total sales commission expense of $20,000.
A retailer’s cost of goods sold is also a variable cost. Assume that a retailer’s cost of products is approximately 60% of their selling prices. If the retailer has sales of $100,000, the cost of goods sold will be approximately $60,000. When sales are $300,000, the cost of goods sold will be approximately $180,000.
