5 Examples of Variable Costs

People who are into business often have a problem differentiating between variable costs and fixed costs. Most of them resort to hiring financial experts to help them sort out these costs. A variable cost is simply an expense that tends to vary with a company’s production volume. Unlike a fixed cost, it increases as the production volume decreases and reduces as the output increases. Here are five classic examples of costs that vary with the production volume.

Direct Materials Cost

Direct materials are all raw materials required to assemble or manufacture a product. Direct materials cost therefore refers to the cost of items used to create a particular product. All the materials used must be easily identified with the end product. They should also be measurable and countable. Examples of direct materials include steel used in the construction of a house, the circuit board included in a computer, the fabric used to make clothes and many others. Things like glue used on books or grease applied on machines may not be considered direct materials since they cannot be counted or easily identified in the end product.

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Supplies and Packaging Materials

Materials used to supply and package goods are considered variable costs because they change with the production and sales volume. A company may choose to reduce the number of packaging materials when its production volume decreases. It can also reduce the number of packaging materials if the sales volume drops. Supplies and packaging materials include bags, twist ties, foils, boxes and plastic wrappers. Most businesses turn to supplies and packaging materials when reconsidering their profitability rates. For example a company that spend $300 to pack 1,500 cupcakes may spend double to pack 3,000 cupcakes. In this case, 3,000 cupcakes will lead to more revenues than 1,500 cupcakes.

Piece Rate Labor

Piece rate labor is the amount of money paid to a given employee for every unit of work completed. This method of payment varies with the input of the employee. The cost increases as the employee’s production rate rises and reduces as the production decreases. Businesses use this type of payment in scenarios where the cost and viability of monitoring production volume must conform to the quality of work done. Other businesses find this mode of payment necessary in scenarios where there are variable skills.


A commission is an additional compensation a company gives to its employees. Employees may receive commissions for exceeding their expectations and meeting the company’s requirements. Most companies give sales commissions at a rate predetermined in a contract agreement. Commissions are variable in the sense that they tend to change with the company’s profitability and the employee’s output rate. A company that does not profit as expected may not give commissions. The same applies if the employees do not meet their set targets.

Shipping Costs

Shipping costs refer to the expenses incurred when a company moves its products and raw materials from one point to another. This can be through water channels, roads, air or railways. Shipping costs are variable in the sense that they tend to change with the production and sales volume. A business will incur more shipping costs if it increases its production and sales volumes. On the other hand, the cost will reduce when the sales and production volumes reduce. The same applies to the transportation of raw materials. A decrease in sales volume leads to reduced demand for raw materials. This will translate to reduced shipping costs.

A cost that varies with production and sales volumes has a significant impact on the profitability of a business. It is important for businesses to reduce their variable costs in order to increase their profitability.