Question

What are variable costs? Please provide and example.

Answer 1

Variable cost are those costs which vary according to the units produced. So if production increases variable cost increases and when production falls variable cost also falls.

Total Variable cost is obtained by multiplying Total Output * Variable Cost Per unit.

Lets understand the above with a few examples

• Sales Commission is a variable cost. We will pay commission to agents on only the units sold by them and not on our entire sales volume of the business
• Labour Cost - We will pay labour on the labour hours worked by them to produce the goods.
• Material Cost- Those materials that are used in production are Variable Cost.
• Shipping or Transportation cost - These costs are incurred only when company sells a product and sends it through Shipping or Transportation.