Since a company’s total costs (TC) equals the sum of its variable ( VC) and fixed costs (FC), the simplest formula for calculating a company’s VCs is as follows.Īverage Variable Cost Per Unit = Total Variable Costs ÷ OutputĬalculating the average variation can be useful when it comes to assessing how variable costs are changing (i.e. market trends, competitors, customer spending patterns).įor example, a company executive’s base salary would be considered a fixed cost because the dollar amount owed by the company is outlined in an employment contract signed by the relevant parties.īut the bonus portion of the executive’s compensation is “variable” since the bonus is performance-based compensation and contingent on the company reaching certain targets thresholds on performance metrics such as: The amount incurred is directly tied to sales performance and customer demand, which are variables that can be impacted by “random” factors (e.g. In contrast, costs of variable nature are generally more difficult to predict, and there is usually more variance between the forecast and actual results. rent, insurance premium) and occur periodically based on a pre-determined schedule, and are usually easier to predict and budget for. Fixed Costs → The costs incurred that remain the same regardless of production volume.įrom the viewpoint of management, variable expenses are easier to adjust and are more in their control, while fixed costs must be paid regardless of production volume.įixed costs encompass a company’s obligations irrespective of the production output (e.g.Variable Costs → The costs incurred that are directly tied to production volume and fluctuates based on the output in the given period.Decreased Production Output → Reduced Variable CostsĪs more incremental revenue is produced, the growth in the variable expenses can offset the monetary benefits from the increase in revenue (and place downward pressure on the company’s profit margins).Increased Production Output → Greater Variable Costs.If product demand (and the coinciding production volume) exceed expectations - in response, the company’s variable costs would adjust in tandem. Variable costs are directly tied to a company’s production output, so the costs incurred fluctuate based on sales performance (and volume). Since costs of variable nature are output-dependent, the costs incurred increase (or decrease) given varying production volumes. Unlike fixed costs, these types of costs fluctuate depending on the production output (i.e. the relationship between these costs and production output is directly linked. Variable costs, or “variable expenses”, are connected to a company’s production volume, i.e. How to Calculate Variable Costs (Step-by-Step) A Variable Cost is output-dependent and subject to fluctuations based on the production output, so there is a direct linkage between variable costs and production volume.
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