Variable costs are those that fluctuate directly with changes in the volume of production. They are also known as variable expenses and fluctuating costs. These costs can be divided into two broad categories: fixed costs, which do not change with output, and variable costs, which vary directly with production. These costs will increase if the business produces more product units; conversely, they decrease if production is reduced. In simple terms, variable cost is a cost that changes in proportion to the quantity produced or sold, such as raw material cost or any other expense that varies based on sales volume. Moreover, Variable Costs must be readjusted after every batch of products has been completed and delivered. These are some examples of variable costs:

Fixed costs

Fixed costs do not change with the number of goods produced or sold. For example, rent, insurance, and interest payments are fixed costs. They do not vary with the level of production or sales because they are independent of the output. Such costs are known as fixed costs because they are expected to remain the same for an extended period, even though production may vary. Fixed costs do not change with the number of goods produced because of the quantity of labor used and the number of fixed assets.

Direct labor

Direct labor is payment to the employees who directly participate in the production process. It is often expressed as a percentage of the product’s selling price. The production manager is responsible for calculating this percentage. The production manager must consider the type of product being made when calculating the direct labor percentage. Direct labor includes the time it takes to make the product, the labor required to make each unit, and the number of units expected to be made during the production run. The number of units expected to be made during the production run is called the production run length.

Indirect labor

Indirect labor is used to describe the time it takes to manage or supervise the people who are making the product. The production manager must also include the delivery required to handle or run others. Indirect labor also consists of the time it takes to keep track of the work.

Materials

Raw materials are the materials that go into making the product. The cost of materials will vary according to the type and quality of materials used and the availability of these materials. The cost of materials may also vary due to changes in the price. Some examples of material costs are the price of steel, plastic, and wood. The price of these materials may change depending upon their supply and demand.

Depreciation

Depreciation is an accounting process used to allocate the cost of a fixed asset. In accounting, depreciation is used for bookkeeping purposes. It is not an actual cash outflow. When a business records the purchase of a fixed asset, such as a machine, it takes an amount off the top to reflect that the device’s value will decrease over time. This amount is called the depreciation expense. The depreciation expense is recorded yearly to remember that the machine’s value has diminished due to wear and tear. Because the device has become less valuable, a business person can expect to sell the engine at a lower price than the original cost.

Variable costs are costs that change according to the level of production. They include materials, labor (direct and indirect), and other costs that vary according to the output level. Fixed costs are the costs that do not change according to the production level. They include rent, interest, and insurance costs. The cost of materials and the wages paid to employees are examples of variable costs. Fixed costs, on the other hand, will not change according to the output level.