What are Variable Costs?
Variable costs are expenditures that increase or decrease with the number of goods or services that a business produces.
Variable costs are also called unit-level costs or short-term costs. They are called short-term costs because unlike fixed costs, they are incurred with every good or service that is produced. If there is no production, the variable cost is zero.
As a business owner it is important to know your variable costs so that you can determine your profitability.
Variable Costs Example
For example, let’s say that you own a local printing business, and you have to figure out the total variable costs to produce one advertising flyer.
To print one flyer you know that you need:
- Printing paper = $1.00 per unit
- Electricity = $1.00 per unit
- Labour Wages = $3.00 per unit
So, if you want to figure out the variable costs to produce 25 flyers then you would use this formula.
Total Variable Cost Per Unit = Total Quantity of Output x Variable Cost Per Unit
Here’s how this would apply to our example:
- Printing paper = 25 X $1.00 per unit = $25.00
- Electricity = 25 x $1.00 per unit = $25.00
- Labour Wages = 25 x $3.00 per unit = $75.00
Total Variable Cost Per Unit = $25.00 + $25.00 + $75.00 = $125.00
It’s worth noting that this does not include what you already have to pay for your fixed costs (printing machine, office, furniture, lighting etc.)
So, if you decide to produce 0 flyers, your variable cost is zero.
The more units you produce, the higher the variable costs and vice versa.Â
