Variable costs are the costs that are not fixed that a company incurs as it generates sales.
It vary directly with the level of production and include costs related to the direct production of the product (such as costs of goods sold- COGS) and many of the marketing costs associated with selling it. Although these costs tend to be uniform for each unit produced, they are called variable because their total varies with number of units produced.
Variable costs are costs that vary in total directly and proportionately with changes in the activity level. If the level increases 10%, total variable costs will increase 10%. If the level of activity decreases by 25%, variable costs will decrease 25%. Example of variable costs include direct materials and direct labor for a manufacturer; cost of goods sold, sales commissions, and freight-out for a merchandiser, and gasoline in airline and trucking companies. A variable cost may also be defined as a cost that remains the same per unit at every level of activity.
More from this Section
- Disintermediation & Channel Conflict
Disintermediation is the process of eliminating layers of intermediaries, such as distributors and wholesalers, to sell directly to customers. Channel conflict occurs when two...
- Switching Costs
Switching costs are the fixed costs that buyers encounter when switching or charging from one supplier to another. If switching costs are high, a buyer will be less likely to switch suppliers.
- Passion for their Business
Passion for their business is an entrepreneur’s belief that his or her business will positively influence people’s lives; one of the characteristics of successful entrepreneurs.
- Reference Account
A reference account is an early user of firm’s product who is willing to give a testimonial regarding his or her experience with the product. To obtain reference accounts, new firms...
- Balance sheet
Balance sheet is a snapshot of a company’s assets, liabilities, and owners’ equity at a specific point in time. The left-hand side of a balance sheet (or the top, depending on how...
- Master franchise agreement
Master franchise agreement is similar to an area franchise agreement, but in addition to having the right to open and operate a specific number of locations in a particular area...
- Cost leadership strategy
Cost leadership strategy is the Generic strategy in which firms strive to have the lowest costs in the industry, relative to competitors’ costs and typically attract...