Variable Cost: Definition, Types, and Examples

When you run a business, variable costs are a system that you must know. The reason is, calculating variable costs correctly will have a big influence on the profits generated.

Basically, any form of business definitely requires costs. These costs include all costs required in the production process until the product is completely finished and ready to be sold on the market.

One thing taken into account is the variable cost. This one thing can also be used as the main basis for analyzing the company's financial aspects.

Understanding Variable Costs

Variable costs are costs incurred by the company and can change according to the amount of production or sales. The value fluctuates depending on the company's production or sales volume. The higher the increase in production, the more expensive the variable costs, and vice versa.

Apart from that, there are also what are called fixed costs. Fixed costs are costs whose amounts are fixed and do not change even if production increases or decreases.

Variable costs themselves have several types. Check out the following review!

Types of Variable Costs

Throughout the production process, there are certain types of costs which are usually included in variable costs, including:

Raw material

Raw materials are materials purchased to be processed through the production process into final products. For example, in the shoe industry, the raw materials include

leather, canvas, thread, sole, etc.

Direct Labor

Direct labor is workers who contribute directly to the production process.

These workers usually receive wages or compensation according to the number of units produced. There are also those who calculate it in terms of the number of hours they spend working at a certain time.

Commission

Commission is usually a percentage of the sales proceeds given by the company as additional compensation. The value of the commission depends on sales performance that meets the specified terms and conditions.

Utilities and Energy Costs

Utility here includes the cost of energy used by production tools. This energy supply can be in the form of electricity, gas, water and various other utilities which are used to power the production process.

Packaging and shipping

Packaging or shipping costs still depend on the quantity of the product itself. Therefore it is included in variable costs.

Shipping products from manufacturers to distributors or from distributors to customers is part of these costs. Packaging, transportation, and all costs related to distribution are also included in these costs.

Example of Variable Costs in a Business

Variable costs for each business may vary depending on the type of business, operational scale, and strategy used. However, in essence variable costs still have the same definition in any business.

Here are some examples of variable costs in a business:

Restaurant Business

• Raw Materials: Costs for purchasing ingredients such as meat, vegetables, fruit, milk, flour, and other food ingredients.
• Labor: Salaries and benefits of employees directly related to production or customer service, such as chefs, servers, and kitchen staff.
• Energy Costs: Electricity, gas, or other fuels used in the cooking process and running kitchen equipment.
• Kitchen Equipment and Service: Maintenance and repair of kitchen equipment, as well as costs for providing table equipment, plates, glasses and other tableware.
• Packaging and Wrapping Materials: Costs for food packaging, takeaway boxes, and other packaging materials used to serve or package food products.
• Cleaning and Maintenance Fees: Cleaning and maintenance of restaurant areas, including cleaning products, detergents, and cleaning service fees.
• Delivery and Logistics Costs: Costs of delivering raw materials or finished food to restaurants or from restaurants to customers (if providing delivery services).

Manufacturing Plant

• Raw Materials: Costs of obtaining raw materials used in the production process, such as metal, plastic, fabric, or other materials.
• Production Labor: Salaries and benefits for workers directly involved in the production process, such as machine operators, assembly workers, and production workers.
• Electricity and Energy: Costs to operate manufacturing machines and equipment, including use of electricity, gas, or other fuels.
• Machinery and Equipment Maintenance: Costs to maintain and repair machinery, equipment and production tools to ensure efficient operations. This includes lubricants, cleaning agents, and other chemicals.
• Shipping Costs: Costs to ship products from the factory to the warehouse or customer. This includes transportation costs, shipping insurance, and additional packaging.
• Quality and Testing Costs: Costs to test and ensure product quality, including inspection, testing, and quality maintenance.

Retail Store

• Merchandise Inventory: The cost of purchasing merchandise to sell to customers. These costs fluctuate with changes in sales volume.
• Sales Force Costs: Salaries, commissions, and benefits for sales employees directly involved in the sales process.
• Promotion and Advertising Costs: Costs for promotional campaigns, advertising, and sales promotions that may change depending on the need to increase sales.
• Packaging Costs: Costs for product packaging, price labels, and other marking materials needed to attract customers.
• Carton and Shopping Bag Fees: Costs for providing cartons or shopping bags to customers as part of the shopping experience.
• Shipping and Delivery Fees:  The cost of shipping the item to the customer or the delivery fee, if the retail store provides delivery services.

That's the information you need to know about what variable costs are, types and examples in various businesses. It is important to understand that variable cost calculations can provide valuable insight for management in managing operations more efficiently.

Variable costs are just one component that must be understood in setting prices in your business. If you want to learn about the right pricing strategy, take the short program Marketing Pricing Strategy from prasmul-eli.

In this two-day program, the scope of learning includes:

• Cost of Product
• Fixed & Variable Costs
• Short Term Pricing Strategy
• Cost Volume Profit
• Target Costing & Cost Analysis for Pricing Decisions
• Product Costing & Variable Costing
• Market and Competition Analysis for Pricing
• Customer Value
• Strategic Pricing.

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