Total costs that change in direct proportion to changes in productive output or activity are Variable Costs. Typical variable costs include direct materials, direct labor, sales commissions and so on.
Variable cost is one which varies directly in proportion to every increase or decrease in the volume of output or production. It neither remains constant nor ever can remain so.
These are those costs which vary with the increase or decrease in production, if the production increases this cost also increases, on the other hand, if the production decreases this cost also decreases. The variable costs vary in total but the unit cost remains fixed.
Variable costs assume that there is a linear relationship between cost and volume of activity. The diagram below shows the relationship: Thus fixed costs are constant in total while Variable Costs are constant per unit.
Examples of variable costs are direct material, direct labor, factory supplies, fuel, power, small tool, royalties, freight in etc.
Characteristics of Variable Costs
- Variable costs vary in total in direct proportion to volume.
- Per unit variable cost remains fixed.
- It can be easily and accurately assigned to operating departments.
- Departmental heads are responsible to control these costs.