Examples of Variable Costs
Variable costs are expenses that change in proportion to the volume of goods or services that a business produces. In other words, they increase as production increases and decrease as production decreases. Here are some examples:
- Direct Materials: These are the raw materials used in the production of goods. If a company produces more products, it will need more materials. For example, a shirt manufacturer will need more fabric to make more shirts.
- Direct Labor: This is the wages and other compensation for employees who work directly on the goods being produced. If a company needs to produce more goods, it may need to pay overtime to workers or hire additional staff.
- Utilities: For some companies, utilities like electricity and gas can be a variable cost. For example, a manufacturer will use more power when it increases production.
- Inventory: Companies that hold inventory often have variable costs associated with storing and managing that inventory. If a company sells more and thus turns over its inventory more quickly, it may have lower storage costs.
- Shipping and Delivery Costs: These costs increase as more products are sold and need to be delivered.
- Sales commissions: If salespeople are paid on commission, these costs will increase as sales increase.
- Credit Card Fees: For businesses that accept credit cards, fees are usually a percentage of the transaction, so these costs increase as sales increase.
Remember, while variable costs play a crucial role in business operations, they are just one part of the total cost of production, which also includes fixed costs (costs that remain constant regardless of the level of production). Understanding the balance between fixed and variable costs can help a company price its products and plan for the future.