variable costs

Meaning

Variable costs are corporate expenses that change in proportion to how much a company produces or sells. Unlike fixed costs, these expenses go up when production increases and down when production decreases. Common examples include raw materials, packaging, and shipping transaction fees.

Examples

• Our variable costs increased this month because we had to order more raw packaging materials.

  Our variable costs increased this month because we had to order more raw packaging materials.

• If we scale down production next quarter, our variable costs will drop significantly.

  If we scale down production next quarter, our variable costs will drop significantly.

• Credit card processing fees are a classic example of variable costs for an online store.

  Credit card processing fees are a classic example of variable costs for an online store.

• We need to calculate our variable costs per unit to set a profitable retail price.

  We need to calculate our variable costs per unit to set a profitable retail price.

• Shipping fees are variable costs that depend entirely on how many customer orders we fulfill.

  Shipping fees are variable costs that depend entirely on how many customer orders we fulfill.

Common Mistakes

• ✗ The rent of our office is a variable cost because it changes every year.

  ✓ The rent of our office is a fixed cost, even if it goes up slightly next year.

  Rent is a fixed cost because it does not fluctuate directly with production or sales volume. Changes in annual lease rates do not make it a variable cost.

• ✗ We need to reduce our variable cost.

  ✓ We need to reduce our variable costs.

  In business discussions, this term is almost always used in the plural form when referring to the category of expenses.

Related Expressions

Practice

• Since shipping fees depend on the number of deliveries, they are classified as ___.

  💡 Expenses that change based on production or sales volume.

  Show answer

  variable costs

• To increase our profit margin, we must find cheaper raw materials to lower our ___.

  💡 Plural term for expenses linked directly to production output.

  Show answer

  variable costs