Variable costs definition

What is a variable cost?

Variable cost is a business expense which is subject to change when sales volumes change. This could mean that variable costs either increase or decrease depending on a company’s current output.

Variable cost vs fixed cost

Unlike variable cost which is subject to change depending on volume of a product or service provided, fixed costs are those which do not fluctuate according to sales volumes. Fixed costs can refer to rent or contractual agreements.

While fixed costs may change over time, it is not because of changes in output. Instead, alterations in contractual agreements or changes in rents can affect the rate of payment for fixed costs.

Variable cost calculation

To determine whether variable costs have increased or decreased, it is good to know how to calculate variable cost. The formula below highlights how to do this:

Variable cost example

As an example of variable cost, let’s assume that the UK was currently experiencing an economic recession. In this scenario, companies might expect that their variable costs would decrease on the back of reduced consumer demand.

This would mean that the company might need to cut jobs or buy in less of the materials that they use to make their products.

Alternatively, if there was currently a period of economic growth, companies might expect production to increase on the back of rising demand. As a result, a company would need to buy more materials and perhaps hire more workers to make their products. Because of this, variable costs would increase in line with an increase in demand.