Variable costs, as opposed to fixed costs, are that part of the expenses that a company makes, directly related to the production of goods and services. And we say directly related to production, because variable costs are zero when there is no production. So if a company does not carry out the business, in principle it would be directly incurring losses, the amount of which would be equivalent to the fixed costs of the activity in question.
This is the reason why there is a tendency to decrease fixed costs, transforming them into variables, as far as possible, or structuring the company or business, so that only variable costs are incurred, or fixed costs be as small as possible. Sometimes it is possible to refer to variable costs as the costs of each unit produced. Thus, it is understood that they are part of the variable costs, both the materials or inputs necessary for the generation of products or services, as are their containers or packaging.
Labor that is directly linked to production can also be considered as part of the variable costs. When reference is made to the concept of variable costs, many times it is actually referring to the average variable cost, or what is the same, to the amount of variable costs divided by the number of units produced. Together with the fixed cost curve and the variable cost curve, the total cost curve is usually represented, which is nothing more than the sum of the two previous ones. Although they are not absolutely identical terms, there is a similarity between variable costs and direct costs, in the same way that there is a similarity between the Indirect costs and fixed costs.
Examples of variable costs
Among the different variable costs we can find:
- Materials in general
- Sales commissions
- Raw Materials