Variable cost stands as a type of corporate expense that determines the selling and production of a company. This cost can differ as per the sales and rates of production done by the company. We can also take the example of airlines that at the initial stage have a very high fixed cost as they are a huge startup cost and are also less vulnerable to competition once they are in business. A restaurant tends to have a variable cost as they are mostly dependent on labor the business is also vulnerable towards most competition. This guide will provide a clear and straightforward explanation of variable costs, their significance, and examples to help you better understand how they impact business operations and profitability.
What Do You Understand by Variable Cost?
Variable costs are recurring charges that contribute to a company's growth and fall, including labor and materials costs. These rates are variable, varying based on the products produced and the company's activities. Rent and insurance costs remain constant, while variable costs vary based on the company's activities.
Variable costs are particularly important for small businesses, as higher costs may lower the margin of profit, indicating lower profitability. In contrast, other industries have more fixed variable costs, dependent on the services and products offered. Therefore, variable costs are crucial for small businesses to manage effectively.
Understanding of Variable Cost With the Help of Examples
The production made by the chair company for the actual rate of chairs produced under which $25 is direct labor and $25 for the direct material and the total cost is $50 per unit. The below-mentioned provides for the same with the total variable cost.
|
Chairs Produced |
Cost of Direct Materials |
Cost of Labor |
Variable Cost |
Fixed Costs |
Total Costs |
|
0 |
$0 |
$0 |
$0 |
$500 |
$500 |
|
1 |
$25 |
$25 |
$50 |
$500 |
$550 |
|
5 |
$125 |
$125 |
$250 |
$500 |
$750 |
|
10 |
$250 |
$250 |
$500 |
$500 |
$1,000 |
|
25 |
$625 |
$625 |
$1,250 |
$500 |
$1,750 |
|
50 |
$1,250 |
$1,250 |
$2,500 |
$500 |
$3,000 |
Key Components of Variable Cost in USA Market
Some of the key components of the variable cost with respect to USA market are discussed below:
Variable Cost Per Unit
This refers to the total cost of the units which are produced and are sold as business products. This also includes the various necessary resources that further include labor, market, materials and other things that are required to sell any of the products. We can take the example of a business that sells chairs for $80 each but the labor costs $25 and the other $25 as material charges and the total production stands at $50 per unit, hence the variable cost will be $50.
Total Variable Cost
The calculation of variable cost involves dividing the cost per unit of a product by the total number of units produced, such as 60 chairs. This results in a total variable cost of $3,000. This helps in accurately calculating the spending on product units.
Average Variable Cost
The average variable cost and spending on a single chair unit can be calculated using the formula: $3,000 (variable cost) / 60 (total output) = $50 (average variable cost per unit). This method is useful for calculating the average cost for multiple products with variable cost per unit.
What are the Different Types of Variable Cost in USA?
The aspect of variable cost differs as per the industrial standards towards which one can make efficient management of the labor and for the products themselves, the below provides for the types of variable cost:
Direct Materials
These are the materials that are used for the production of a unit and stand as the basic essential towards the production of the company cost. One can further calculate the occurring variable cost which is made through this type of projection and also differ as per the materials.
Production Equipment
This refers to the equipment which is essential for the supply of production, these also play a crucial role in the production of the products in a more efficient manner and fulfill the requirement of the cost and other forms of variable cost. Thus one can make efficiency out of the production units.
Direct Labour
This includes the efficient management of labor cost towards the process of production and other amounts which are essential towards the particular type of operations and helps the proper production of units.
Commissions
The company provides for commissions which are very much essential towards the development of the needs and services and because of this one can make valuable production rates in the company.
Transaction Fees
This comes with the payments which are made through card payment towards the customers and one has to pay a certain variable cost towards the actual rates of sale towards the production of the company.
Utility and Shipping Costs
These are made available towards the levels of production in the facilitating of the operations towards which one makes an efficient management of the productions and other forms of transportation which takes place.
Why Variable Costs are Important for Different Businesses?
Some Of the key points with respect to the importance of variable cost for the businesses are discussed below:
- To determine the pricing of the variable expenses and the other forms of cost that take place for the business insights which further involves the setting of prices and other profits.
- Determine the break-even point which is the number of units which are sold that will eventually break all the expenses and essential for further calculating a proper breakpoint.
- To make proper budgeting and planning which also helps for the proper expansion of business constraints and increase the variable cost and other expansion of plans to be done.
- To calculate the actual margin of the net income and the other variable expenses which is required to be done at the earliest thorough that one can make a proper analysis of the business structure.
- To choose the expense structure through which the finances of the company are evenly managed through the piece of productions which can be made properly for the manufacturing.
Conclusion
In conclusion, variable costs are an essential aspect of a company's financial management, as they fluctuate based on production levels and sales activity. By understanding and controlling these costs, businesses can make informed decisions about pricing, profitability, and operational efficiency. Whether it’s adjusting raw material purchases or managing labor expenses, keeping a close eye on variable costs helps businesses adapt to changing demand and optimize their financial health.
