Meaning of Variable Costs

By | June 1, 2021

So-called variable costs are part of business cost accounting. This is part of the total cost. It is the part that changes when the reference variable under consideration changes. Variable costs are also referred to as quantity-dependent, movable and variable costs. The counterpart to the variable costs are the fixed costs. These are called fixed costs . In contrast to these, the quantity-dependent costs can be distributed over product units so that it is possible to calculate the unit costs. This happens through the so-called cost resolution, in which the fixed costs and the variable costs are calculated proportionally.
There are also costs that change, but do not behave along a cost curve. This includes, for example, depreciation and energy costs. Such costs are called mixed costs.

Variable costs can be distributed according to their causation

According to sciencedict, the causation principle is also known as the cost allocation principle. This is a procedure in which costs are converted to the reference values. If, for example, a product unit is selected as a reference value, all costs of such a unit can be calculated depending on the allocation principle used. In this way it is possible to keep the unit cost. In some ways, one problem with cost allocation is that there are overheads. These fixed costs are mostly independent of the production volume, which is why they are difficult to allocate to a product unit. The cost allocation principle differentiates between multi-dimensional and one-dimensional cost accounting principles.

How do variable costs arise?

As already indicated, variable costs are very closely related to the quantities of services and goods produced. Depending on the production volume, variable costs rise or fall, in contrast to fixed costs, which are always the same.

An example of changeable costs

A company produces juice. In March 2015, 850 juices were produced for the trade. The cost of the raw materials, i.e. the vegetables and the fruit, was 30 cents per liter of juice in March. That is then 255 euros. A month later, 890 juices were produced as demand increased. Because the raw material costs are 30 cents, the variable costs have risen to 267 euros as a result.

This is how variable costs are broken down

One can distinguish variable costs from one another by looking at their “nature”. There are some typical manifestations of variable costs:

  • Proportional costs: These costs increase in the same proportion as the level of employment
  • Regressive costs: These increase when employment falls and, conversely, decrease when employment increases
  • Progressive costs: These costs, also known as disproportionate costs, rise more than the level of employment
  • Degressive costs: These costs are also called disproportionate costs and they increase less than the level of employment

Since variable costs are a term from business administration, they must of course also be classified in this context:

The variable costs in business

In the context of business administration , for example, the following costs can be described as variable costs:

  • raw materials
  • Energy costs
  • External services
  • Performance wages
  • Freight and transport costs
  • Commissions

Where there are variable costs, there are always fixed costs. The two costs are opposites, which is why they cannot be separated from each other and must be mentioned in the next paragraph:

Variable costs and fixed costs

Fixed costs, as fixed costs, are the opposite of variable costs that change. Fixed costs are always incurred in a certain period of time, they are not dependent on the quantity produced or the level of employment. Of course, there are typical examples that can be mentioned in connection with fixed costs:

  • Energy costs for offices
  • Depreciation that occurs on a straight-line basis
  • Wages and salaries as basic wages
  • Rent and lease

When it comes to piecework wages, i.e. a performance-related salary, wages and salaries are variable costs. Otherwise, if the basic wage remains the same, they count towards the fixed costs.

Contribution margin: sales minus variable costs

Since a profit can only arise if more money is earned than is spent, the contribution margin is directly related to the profit and the variable costs. One reason why the Beck contribution margin is explained in more detail below:

The contribution margin is the amount of money that is needed to cover the fixed costs of a production volume. As soon as the contribution margin exceeds the fixed costs, one speaks of a profit. The contribution margin is calculated by subtracting the variable costs from the revenue. An example:

The company has produced 890 juices at a unit price of two euros 90. The result is then 2581 euros. The variable costs, which consist of costs for freight, energy and raw materials, are 55 cents per liter of juice. This results in variable costs of 489.50 euros. The fixed costs are therefore 1300 euros.
So that the contribution margin can be determined, the 489.50 euros are now deducted from the 2581 euros. The contribution margin is therefore 3091.50 euros. If the fixed costs of 1,300 euros are also deducted, a profit of 791.50 euros remains.

Conclusion: variable costs as an antipole to fixed costs

In addition to fixed costs, a company always has costs that change. These are divided up differently, for example proportional costs and progressive costs. Variable costs are the costs that either increase or decrease depending on the quantity produced. These are, for example, raw materials and performance-based salaries. And then there is something between the fixed costs and the variable costs, namely the mixed costs. These costs cannot be clearly assigned to those that are fixed or that change according to a certain course.
The variable costs themselves are explained relatively quickly and easily. As with many terms from business administration, it is the terms around them that must be plausible and important. For this reason, a few other terms related to variable costs have been listed in this text. It was about answering the most important questions and providing an insight into the topic. For example, it was important not only to mention the variable costs, but also their opposite, namely the fixed costs. The contribution margin is also an important term in this context, so this was also briefly touched upon.

Variable Costs