What Is a Variable Cost?
A variable cost is a cost incurred by a business and is associated with the number of services or goods it produces.
When a business is producing more goods, the variable costs will increase – and as you might imagine, if the volume decreases, so does the variable cost.
Variable cost is often mentioned in the same breath as fixed cost. Fixed cost, however, remains the same no matter how many goods a business is producing.
What Is the Variable Cost Formula, and How Is Variable Cost Calculated?
There are two main variable cost formulas: total variable cost and average variable cost.
You calculate total variable cost by taking the cost to make one unit of your product, and multiplying that by the number of units produced.
So if it costs $50 to make one unit, and you’ve made 40 units, your total variable cost will be $50 x 40 = $2000.
The formula for average variable cost requires you to have already worked out your total variable cost. The formula looks like this:
Average variable cost = total variable cost of product 1 + total variable cost of product 2 [and so on] / total number of units made
Variable Cost Examples
There are many examples of where variable costs are used – here are some of the most common:
- Billable labor – the more products you make, the more staff you need.
- Commissions – if you have a sales team working for you, then the more your company sells, the more the commission is going to be.
- Direct materials – this is anything that you’ve used to build your products. The more you make, the more you need.
See our full list of over 50 Small Business Terms here.
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