Variable costs are one of the major cost group using in manufacturing or sales businesses. The definition of variable cost is the sum of the costs incurred for the completing of production in a manufacturing activity and the costs incurred in other production. Combining the variable cost and fixed costs helps to determine the total production or sales cost of a business.
What is Variable Costs?
Variable cost determines depending on the quantity of the product or service produced. When producing 1 liter of lemonade, you spend 3 lemons. While you spend 10 liters of lemonade, you spend 30 lemons. At this point, you must consider the cost of the lemon as a variable cost of the lemonade. On the other hand, costs such as labor or rent which are spent even if you do not produce, are your fixed costs. Fixed costs are taken into account in the calculation of total production cost.
What is a Variable Cost Example?
Products or raw materials that directly involved in the production stage are the best examples of variable costs. If you work in a company that produces packet tea; the cost of tea, paper envelope and package you spend to produce tea will be your variable cost. When determining whether a cost is a variable or a fixed cost, you need to determine whether the cost is related to production. If your cost depends on production, that cost will be classified as variable cost.
Are Salaries Fixed or Variable Costs?
Employees are the one of the main pillars of manufacturing processes, without them operations will stop in most cases. Employees work for you for a certain salary, either monthly or daily. You must pay the salaries of your employees even if your production stops for a different reason within a production period. That is, whether your business has more or less production, it does not change your obligation to pay the salaries you promised to pay to your employees. Therefore, the salary payments you make to employees are considered as fixed costs.
Is Raw Material Fixed or Variable Cost?
Raw material is the materials that must be consumed during a production process. If a production activity has not started, raw materials will not be consumed and the cost will not be incurred. Due to its nature, raw material cost is considered as variable cost.
What is the Difference Between Variable and Fixed Costs?
Variable costs are the costs that arise when the production line works. Variable costs, also called material costs, start to emerge as soon as you start production. If you’re a lemonade producer, you’ll start spending lemon, water and sugar and it starts the variable cost of these materials as you’ll have to buy them for your next production. On the other hand, fixed costs are the costs you should spend even if you do not produce. Once you have rented a shop and applied for electricity and water, even if your business has not yet started production, these costs will be reflected to you as standard cost and will be included under your fixed costs.