What is a variable cost?

Definition of variable cost

A variable cost is a cost that changes with how many sales your business makes or how active it is.

'Fixed costs' are the opposite of variable costs.

The term 'variable costs' is often used interchangeably with 'costs of sales'. However these two are not exactly the same, since you can have variable overheads (such as bookkeeper's fees, which are likely to be higher as a business grows, given it will have more transactions) and fixed costs of sales (such as rent of a factory where goods are made).

Examples of variable costs:

Examples of variable costs would be hourly salary for factory workers, the cost of raw materials to make goods, and the cost of electricity and gas to light and heat a room at home for work.

A business's variable costs may be given in one figure, or in a figure per unit of sales, to help a business work out how much profit it earns on different types of sales before its fixed costs kick in. Examples of types of sales might be products, regions or markets. A type of sales' selling price per unit less its variable costs per unit is called its 'contribution'.