Variable Costs Example

Variable costs are those that vary depending on the level of production or sales of a company. These costs change if the company produces more or less or if the company sells more or less. In this article you will learn what they are, their importance, examples and how to calculate them.

If there is a work stoppage, cut in the supply chain or some eventuality, these costs are affected. For example, purchase of materials, shipping and transportation costs or sales commissions.

Importance of Variable Costs

It is important to know the variable costs to identify if a product or service is profitable and how much it contributes to cover costs and generate profits.

By adding the variable costs with the fixed costs, it is possible to determine the level of sales necessary to cover the costs and make a profit. In other words, know and determine the break-even point of the company.

If there is a change in variable costs, the margin is affected (positively or negatively) and with it profitability.

• You are interested in: Fixed costs

10 Examples of Variable Costs

1. Raw materials or inputs necessary for the production of goods or services.
2. Direct labor costs for production or provision of services.
3. Costs of electricity and water, which may vary depending on the level of production.
4. Sales commissions.
5. Shipping and transportation costs of products to customers.
6. Packaging and labeling of products.
7. Indirect material costs, such as lubricants, greases, and other inputs necessary for production.
8. Advertising and promotion expenses that vary according to the level of sales.
9. Maintenance and repair costs for machinery and equipment, which may vary depending on the amount of use.
10. Purchases of materials and supplies that are required based on the level of production or sales.

How to Calculate Variable Costs

Calculate fixed costs in 3 simple steps:

1. Identify

Identify direct inputs. They are those that vary depending on the amount of production or sales. For example, production materials, repair or maintenance of equipment or electrical energy.

2. Add

Add up all the variable costs that you have identified and get the total.

3. Split

Divide the total fixed cost by the number of products or services produced to get the fixed cost per unit.

Variable Cost Calculation Example 

Concept	Unit cost ($)	quantity produced	Total variable cost ($)
Raw Materials	5	1,000	5,000
direct labor	8	1,000	8,000
Electric power and water	0.50	1,000	500
Sales commissions	2	500	1,000
Shipping and transportation cost	1	1,000	1,000
Packaging and labeling	0.50	1,000	500
indirect materials	1	1,000	1,000
Advertising and promotion expenses	500	5,000	500
Maintenance and repair costs	2	1,000	2,000
Purchases of materials and supplies	1	1,000	1,000
Total Variable Costs	20,500

The table above specifies the unit cost of each input, the quantity produced, and the cost is calculated. total cost of each concept multiplying by the unit cost to add and obtain the total costs variables.

This table is used to determine the price of and helps identify cost reduction opportunities and know the profitability of each product or service.

You must add the fixed costs to have a complete vision of the state of the company.