Financial modelling terms explained

# Variable Costs

Variable costs are costs that change depending on the level of production. Variable costs are expenses that are directly proportional to the production level of a business.

## What Are Variable Costs?

Variable costs are costs that vary with the level of output. In other words, they increase as production increases and decrease as production decreases. Variable costs include things like the cost of raw materials, wages, and energy costs.

## How Do You Calculate Variable Costs?

Variable costs are incurred in response to changes in the level of activity or output in a business. They are costs that vary with the level of activity, and so they are also known as direct costs. For example, the cost of materials that are used in production will vary with the level of production. The cost of labour will also vary with the level of production, as will the cost of any other variable inputs used in production.

To calculate the variable cost for a given level of activity, we simply multiply the cost of the variable input by the level of activity. For example, if the cost of labour is \$10 per hour, and the level of activity is 100 hours, then the total variable cost for labour would be \$1,000. If the level of activity increases to 200 hours, then the total variable cost for labour would increase to \$2,000.

## Why Is It Important to Know Your Variable Costs?

Variable costs are important to know because they can help inform business decisions. For example, a business might decide to produce more of a product if the variable costs associated with producing that product are low. Alternatively, a business might decide to stop producing a product if the variable costs associated with producing that product are high. Knowing your variable costs is essential for making smart business decisions.

## What's the Difference Between a Fixed Cost and a Variable Cost?

A fixed cost is a cost that does not change with the level of production or output. A variable cost, on the other hand, does change with the level of production or output. For example, if a company has to pay a fixed rent cost of \$10,000 per month, regardless of how much product or services it produces, that would be a fixed cost. If, however, the company has to pay \$1 for each unit of product it produces, then that would be a variable cost.

## What is An Example of a Variable Cost?

Variable costs are costs that change with the amount of output produced. For example, the cost of the raw materials used in production may vary with the level of production.

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