An expense is a variable expense when its total amount changes in proportion to the change in sales, production, or some other activity.

To illustrate a variable expense, let's assume that a website business sells a product and requires that the customer use a credit card. The credit card processor charges the business a fee of 3% of the amount charged. Therefore, in a month when sales are \$10,000 the business will have a credit card expense of \$300. If sales are \$30,000 there will be a credit card expense of \$900. The total credit card expense varies with sales because the fee has a fixed rate of 3% of sales.

Another example of a variable expense is a retailer's cost of goods sold. For instance, if a company purchases a product for \$30 and then sells it for \$50, its cost of goods sold will be a constant rate of 60%. Hence when its sales are \$10,000 the cost of goods will be \$6,000. When the sales are \$30,000 the cost of goods sold will be \$18,000.

Knowing how costs behave when sales or other activities change will allow you to better understand how a company's net income will change. It also allows you to quickly calculate a product's contribution margin and to estimate the company's break-even point.