Variable cost
lastmod 2025-08-26created 2025-08-262 edits
Variable costs are the direct and indirect costs a company incurs when producing or selling goods and services. They can vary with the volume of products produced or services provided. Variable costs are proportional to production volume: they rise as production increases and fall as production decreases.
High fixed costs relative to variable costs tend to require a business with a high contribution margin to operate successfully. Alternatively, high fixed costs can be offset by increasing sales volume despite a low contribution margin.
Categories
Examples of variable costs
- Direct materials – the main raw materials fundamentally required to produce a product
- Build costs – items such as oil or lubricants used to maintain machines
- Unit labor cost – the amount paid to workers per unit of product
- Ordinary wages – the amount paid to workers based on set working hours
- Commissions – the amount paid to salespeople per unit sold
- Freight in/out – freight or shipping expenses incurred only for goods delivered upon customer orders
- Variable operating costs – electricity or water used to produce goods and services