A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with volume or activity. Generally, a product's direct materials are a variable cost.
To illustrate, let's assume that a bakery uses one pound of flour at a cost of $0.70 per pound for every loaf of bread it produces. If no bread is produced the total cost of flour is $0. If one loaf is produced the total cost of flour is $0.70. When 10 loaves are produced the total cost of flour is $7.00. At the volume of 30 loaves the cost of flour is $21 (30 loaves X 1 pound X $0.70 per pound).
An expense can also be a variable cost. For instance, if a company pays a 5% sales commission on every sale, the company's sales commission expense will be a variable cost. When the company has no sales the total sales commission expense is $0. When sales are $100,000 the sales commission expense will be $5,000. Sales of $200,000 will mean total sales commission expense of $10,000. Sales of $400,000 will result in total sales commission expense of $20,000.
