Variable costs

Last updated: 27.03.2016

Variable costs are costs that change with the production volume. If the level of production decreases, total variable costs decrease as well and vice versa.  But unit variable costs remain unchanged with the changed production volume.

Opposite to variable costs are fixed costs.

 

Behavior of variable costs

 

Most of direct costs (direct material, labor, expenses) are variable.

 

BUT - variable cost is not a synonym to direct cost

Variable costs do not necessarily need to be direct (e.g. variable component of power costs for operating production lines which vary with the production level, but it is difficult to clearly identify it with a product) and direct costs do not necessarily need to be variable (e.g. costs of setting-up a production line for a specific product where number of units produced are irrelevant).

 

Variable costs can be

  • Linear (proportionate) – if the production increase, costs increase in the same proportion and unit costs remain unchanged ; e.g. basic raw material
  • Progressive – if the production increase, costs increase more quickly and unit costs increase; e.g. premiums for shifts or overtimes
  • Degressive – if the production increase, costs increase more slowly and unit costs decrease; e.g. material costs when buying in bulk


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