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Variable Cost

Ankit0

Definition:

Variable cost is an expense that changes in direct proportion to the changes in the level of production or sales. In other words, as the company produces or sells more units, its variable costs increase.

Examples:

Formula:

Variable cost per unit = Variable cost / Number of units

Key Features:

  • Variable: Costs that fluctuate with changes in production or sales.
  • Directly related: Directly related to the production or sales of units.
  • In proportion: Changes in variable costs are in direct proportion to changes in production or sales.
  • Unpredictable: Can be unpredictable, especially in the short term.

Example:

A company manufactures 10,000 units of a product. The variable cost per unit is $50. The total variable cost is:

Total variable cost = 10,000 units x $50 per unit = $500,000

Benefits:

  • Provides flexibility: Variable costs allow companies to adjust their operations based on demand.
  • Accurately reflects costs: Variable costs are more accurate than fixed costs as they fluctuate with production or sales.
  • Facilitates cost control: Variable costs can be easier to control than fixed costs.

Drawbacks:

  • Fluctuations: Variable costs can fluctuate widely, which can make it difficult to forecast expenses accurately.
  • Uncertainties: Uncertainties in demand can lead to fluctuations in variable costs.
  • Difficult to estimate: Estimating variable costs can be difficult, especially in the long term.

FAQs

  1. What is a variable cost, and can you give an example?

    A variable cost is an expense that changes in proportion to the level of production or sales. For example, raw materials for manufacturing increase as more products are made.

  2. What is an example of a fixed and variable cost?

    Rent is a fixed cost, as it stays the same regardless of production levels, while labor costs can be variable if they depend on hours worked or units produced.

  3. What is meant by variable costing?

    Variable costing is an accounting method that includes only variable production costs (like materials and labor) in the cost of goods sold, excluding fixed costs.

  4. Is salary a variable or fixed cost?

    Salaries are typically a fixed cost, but wages based on hours worked or production output can be variable.

  5. What are fixed and variable cost examples?

    Fixed costs include rent, insurance, and salaries, while variable costs include raw materials, shipping, and sales commissions.

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