Variable Costs Examples in Business
Definition for Variable Costs
A variable cost is a cost that changes dependent on how much a business’ output changes.
To put it another way, the more goods or services a business produces, the higher the variable costs.
Similarly, the fewer goods or services a business produces, the lower the variable costs.
Calculating Variable Costs
For example, let’s say that the total variable costs for a product is £17. This is made up of direct materials (£10), packaging costs (£2), utility costs (£3) and shipping cost (£2).
If the business doesn’t produce any of the product, the variable costs are zero. There may be fixed costs involved, but there wouldn’t be anything in terms of variable costs.
If the business was to produce ten units of this product, the variable costs calculation would be ten times the cost of one unit.
Furthermore, if the business was to produce a hundred units of this product, the variable costs calculation would be a hundred times the cost of one unit.
What are Examples of Variable Costs?
In order to determine whether a cost is variable or not, you should think about if that cost changes each month or stays the same.
Businesses can incur a number of variable costs each month, and the following list of examples covers the most common types:
Variable Costs Example #1 – Direct Materials
Direct materials can be regarded as the very definition of a variable cost, as these are the raw materials that are used to produce a product for sale.
For example, if there was a manufacturing company that built wooden tables, the variable cost of production would be the wood used for each table, and would increase proportionally with the number of tables manufactured.
Variable Costs Example #2 – Piece Rate Labour
Some businesses might pay workers for every completed unit they produce. For example, a business that manufactures shoes may pay each worker for each pair of shoes they produce. As the workers complete more shoes, they will be paid more, so the cost to the company increases in line with their variable output.
This is not to be confused with direct labour, which is a fixed cost. For example, the shoe factory might employ a supervisor to oversee production. This person would likely be paid a fixed amount, and the total output of shoes would not affect their salary.
Variable Costs Example #3 – Commissions
Commission pay is cost related to the performance of staff hitting particular goals or targets. This can be for making a sale, or persuading a new client to sign up for their services.
For example, in a recruitment business, recruitment advisors would be paid a commission for each job role they are able to fill, and so the more roles they fill, the more commission they will receive.
Variable Costs Example #4 – Packaging
The packaging that the products are sold in would also be classed as a variable cost because as more products are manufactured, more packaging would be required before the product can be sold.
For example, in a company that produces boxes of chocolates, the more chocolates they produce, the more boxes are needed.
Variable Costs Example #5 – Transaction Fees
A business may incur a transaction fee every time a customer uses a credit card for payment. Therefore, the more times that customers use a credit card, the more the business will be charged.
Similarly, the business may use an online payment partner, and pay a small fee each time a customer purchases a product online. Consequently, the more orders that are received, the higher the cost would be to the business.
Variable Costs Example #6 – Utility Costs
Utility costs such as gas, electric and water would be variable if they are directly attributable to the output of a business.
For example, a company that produces handmade glass vases would need gas to fuel the furnaces, water to cool down the equipment and electricity to power the air conditioning and lighting.
If the business had an unusually large order to fulfil, the variable utility cost would increase and they would use more gas, water and electric than if they were just fulfilling a standard order
This is because the furnace would be in operation for longer, more water would be needed to cool the equipment, and staff may have to work longer than usual and so the air conditioning and lighting would remain on after standard working hours.
Variable Cost Example #7 – Shipping Costs
Shipping costs are incurred when a business transports its products from one point to another, and would typically either be from purchasing supplies or sending out items to customers.
This can be through land, sea or air, and shipping costs are variable because they change depending on production levels and sales quantity.
For example, if a company that builds skateboards suddenly experiences elevated demand levels, they would have to purchase more raw materials and send out more orders, which would increase shipping costs in and out of the business.
Variable Cost Example #8 – Vehicle Fuel and Mileage
Vehicle fuel and mileage would be a variable cost as the total distance travelled each month is unlikely to be constant and consistent.
For example, a self-employed plumber would have to travel around the city to fix various water issues at customer houses. Some days they might only travel close to their base of operations, and other days they might have to travel larger distances. Also, the plumber might receive a large number of jobs one week, so would require more fuel, and then might a quieter week the next week, so wouldn’t need to fill up the tank for a little longer.
