What is a variable cost?
Variable costs rise when you sell more and fall when you sell less. If you make nothing, total variable costs are zero. In contrast, fixed costs such as rent stay the same regardless of volume.
Examples
- Raw materials and components
- Packaging
- Shipping and delivery per order
- Payment processing fees
- Sales commissions
- Direct labour paid per unit or per hour worked
- Hosting costs that scale with usage
Formulas
Total variable cost = Variable cost per unit × Units produced
Contribution margin = Price − Variable cost per unit
Example
A T-shirt company pays $6 for each blank shirt, $3 for printing and $1 for packaging, so the variable cost is $10 per shirt. Selling 1,000 shirts costs $10,000 in variable costs; selling 2,000 costs $20,000.
Fixed, variable and semi-variable
- Fixed: rent, insurance, salaried staff
- Variable: materials, commissions
- Semi-variable: a fixed base plus usage, such as utilities or phone plans
Why it matters
Variable costs determine contribution margin, which drives [break-even point](/glossary/break-even-point) analysis, pricing and decisions about discounts or special orders.