Variable cost is a financial metric used by countless businesses. The term “variable cost” refers to non-fixed expenses related to the production of goods or products. Therefore, a business’s variable costs will fluctuate depending on its production volume. The higher a business’s production volume, the higher its variable costs will be. But this is just the basics of variable costs. To learn more about variable costs and how it’s calculated, keep reading.
Variable Costs Explained
Although there are exceptions, most businesses that produce and sell goods or products will incur two types of expenses when conducting their operations: fixed costs and variable costs. The first type expense, fixed costs, consist of expenses with a static, fixed price. Leasing a storefront building, for example, is considered a fixed cost because businesses owners pay the same amount for their lease payment each month. Payroll is another fixed cost incurred by businesses. While different employees are paid different amounts, the pay rate is static, thus making it a fixed cost.
Variable costs differ from fixed costs in the sense that they vary depending on the business’s production volume. This is in stark contrast to fixed costs, which are not affected by production volume. As previously mentioned, variable costs increase when production volume increases and lower when production volume lowers.
Examples of variable costs include the following:
- Licensing fees
- Utility bills
- Credit card transaction fees
- Freight charges
Why Businesses Should Track Variable Costs
Tracking variable costs can help businesses succeed in several ways. First, it provides insight into how much a business spends to create the goods or products that it sells to customers. While tracking fixed costs are important, variable costs are equally if not more importance because they fluctuate depending on production volume. Businesses will have a better understanding of how much money they spend, however, by tracking variable costs as well.
Another reason businesses should track variable costs is to ensure that they aren’t spending more to make their goods or products than the revenue generated by those goods or products. If a business only tracks its revenue, it won’t be able to optimize its operations for higher profit. To maximize profits, businesses must measure all production-related expenses, including fixed and variable costs. By keeping a close eye on these metrics, businesses will have an easier time boosting their profits and dominating their target market.
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