# What is a variable cost?

Author:
Harold Averkamp, CPA, MBA

## Definition of Variable Cost

A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with the change in volume or activity.

## Examples of Variable Costs

Generally, a product’s direct materials are a variable cost. For example, if a bakery uses one pound of flour for every loaf of bread it produces, the flour is a variable cost. If the flour costs \$0.40 per pound and no bread is produced, the total cost of flour will be \$0. If one loaf is produced, the total cost of flour will be \$0.40. When 10 loaves are produced, the total cost of flour will be \$4. If 50 loaves are produced, the cost of flour will be \$20 (50 loaves X 1 pound X \$0.40 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. If the company has no sales, the total sales commission expense will be \$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.

A retailer’s cost of goods sold is also a variable cost. Assume that a retailer’s cost of products is approximately 60% of their selling prices. If the retailer has sales of \$100,000, the cost of goods sold will be approximately \$60,000. When sales are \$300,000, the cost of goods sold will be approximately \$180,0000.

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