# What is a variable expense?

Author:
Harold Averkamp, CPA, MBA

## Definition of Variable Expense

An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity. In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases.

## Examples of Variable Expenses

Assume that a website business sells a product and requires the customer to pay with a credit card. The credit card processor charges the business a fee of 3% of each amount charged. Therefore, if the business has sales of \$10,000 in the month of June, the business will have a credit card expense of \$300. If July’s sales are \$30,000 the credit card expense will be \$900. The total credit card expense varies with sales because the fee has a constant 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 is able to sell it for \$50, the company’s cost of goods sold will be a constant rate of 60% (\$30 / \$50). Therefore, when the company has sales of \$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 gross profit and 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.

## FAQ

What is a 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.

What is a fixed expense?
A fixed expense is an expense whose total amount does not change when there is an increase in an activity such as sales or production.

What is a fixed cost?
A fixed cost is one that does not change in total within a reasonable range of activity.

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