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.
Learn more about variable costs
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.
Learn more about fixed expenses
What is a fixed cost?
A fixed cost is one that does not change in total within a reasonable range of activity.
Learn more about fixed costs
