Variable Costs

The Formula:

Variable costs, as opposed to fixed costs, which are rigid and do not directly contribute to production, are flexible and vary according to total output produced.

When you buy a new car, for example, you are incurring a fixed cost because, while the vehicle is capable of driving, it cannot do so unless it receives a consistent inflow of fuel every now and then. The recurring cost of gasoline is what keeps the car running. The cost of fuel is variable.

Fixed costs in business would be your machinery, factory, land, and so on. Sure, those things are required for output, but simply putting them in place will not result in output. To do so, you’ll need raw materials, labor, small equipment, and so on.

Variable costs are directly proportional to your output, meaning they rise as output rises and fall as output falls. A rise in variable costs is frequently interpreted as a sign of increased sales.