What are variable costs?

Variable costs are expenses that fluctuate in direct correlation with the level of production or sales volume. This means that as a business produces more goods or services, the total variable costs will increase because these costs typically rise with each unit produced. For example, if a manufacturer is making more products, it will need to purchase additional raw materials, pay for more labor involved in production, and incur higher shipping costs, all of which contribute to variable costs. Conversely, if production decreases, variable costs will also decline.

Understanding variable costs is critical for businesses as they affect overall profitability and pricing strategies. They are contrasted with fixed costs, which do not change with the level of production, and provide essential insights into the flexibility and scalability of a company’s operations.