Variable costs

Definition

Variable costs are expenses that change in direct proportion to the level of production or sales volume. They increase as production rises and decrease when production falls.

5 Must Know Facts For Your Next Test

1. Variable costs include direct materials, direct labor, and variable manufacturing overhead.
2. They differ from fixed costs, which remain constant regardless of production levels.
3. Variable costs are crucial for calculating the contribution margin.
4. In cost-volume-profit analysis, knowing variable costs helps determine the breakeven point.
5. Short-term decision-making often relies on understanding how variable costs will change with different production levels.

Review Questions

• What are some examples of variable costs?
• How do variable costs impact the calculation of the contribution margin?
• Why is it important to differentiate between variable and fixed costs in short-term decision-making?

Related terms

Fixed Costs: Expenses that remain constant regardless of changes in production or sales volume.

Contribution Margin: The amount remaining from sales revenue after variable expenses have been deducted.

Breakeven Point: The level of sales at which total revenues equal total costs, resulting in neither profit nor loss.