Variable costs
Variable costs (pronunciation: /ˈvɛərɪəbəl kɒsts/) are a type of economic cost that vary in direct proportion to the volume of output produced. They are also known as direct costs or product costs.
Etymology
The term variable cost is derived from the fact that these costs vary with the level of output. The word variable comes from the Latin variabilis, meaning changeable, and cost comes from the Old French cost, meaning outlay or expenditure.
Definition
Variable costs are expenses that change in proportion to the activity of a business. In contrast to fixed costs, which remain constant regardless of output, variable costs increase or decrease depending on a company's production volume; they rise as production increases and fall as production decreases.
Examples
Examples of variable costs include raw materials, direct labor costs, and manufacturing supplies. For instance, if a company produces more goods, it will need more raw materials, and thus the cost of raw materials will increase.
Related Terms
- Fixed costs: These are costs that do not change with the level of output. They are the opposite of variable costs.
- Total costs: This is the sum of fixed and variable costs.
- Marginal cost: This is the cost of producing one more unit of a good.
- Cost behavior: This is the relationship between a company's production volume and its costs.
See Also
References
- Drury, C. (2008). Management and Cost Accounting. Cengage Learning EMEA.
- Horngren, C. T., Datar, S. M., & Rajan, M. V. (2011). Cost Accounting: A Managerial Emphasis. Pearson.
External links
- Medical encyclopedia article on Variable costs
- Wikipedia's article - Variable costs
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