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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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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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