In simple terms, variable cost is an investment that we infuse our money in raw materials, labor costs, transaction fees, commission, and utility costs to get an ” X ” final product.
What is Variable Cost? Definition
Variable cost is an expense faced by any business to get their final product. Variable cost changes proportional to their no: of production units which means the variable cost increases when the production rate increases also decrease when the production rate decrease.
VC: raw material cost + labor cost + other fees
Key Points:
- VC is expenses invested by businesses to get their final product
- VC increases and decreases proportionally to the production rate of the business.
Understanding Variable Cost
Every business has there own expenses to meet its goals. That expenses can be divided into two cost one is Variable cost and Fixed Cost. VC depends on the production rates completely as the volume of production increases VC also increases and obviously when the volume of production decreases variable cost is also decreased.
Variable Cost Example: Take the phone as a final product for that we need raw materials like camera, processors, memory, battery, sensors, display, pins, and buttons, etc which is considered as raw material cost. To make the final product we need to assemble the raw materials into one that’s where we need labor help and that’s why the business has a labor cost. finally, we need marketing and other expenses like transportation costs. this all costs combined called Variable Cost.
| Final Product | Raw Materials Cost | Labor Cost | Other Expenses |
|---|---|---|---|
| Phone | $200 | $50 | $100 |
| Total Variable Cost | $350 |
Differences Between Variable Cost and Fixed Cost
Variable cost change is proportional to the volume of production which is not a must pay cost. But Fixed cost is totally different from that Fixed cost remains fixed irrespective of the production rate some fixed cost expenses are rents, salaries of staff, interest, maintenance cost, and machine expenses are part of Fixed cost.
Key Points:
- Variable cost is proportional to the volume of production, if no production no VC.
- Fixed cost is must pay expenses for businesses irrespective of loss, demands Etc
Thanks For Reading.
