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Variable Costs
Definition
Variable costs are expenses that change in proportion to production volume or sales, such as raw materials, packaging, and shipping.
Explanation
Variable costs increase as production increases and decrease when production slows. Examples include raw materials, direct labor, packaging, shipping, and sales commissions. Variable costs per unit remain constant, while total variable costs fluctuate with volume.
Controlling variable costs through efficient sourcing and production improves profitability. Lower variable costs per unit increase contribution margin and reduce break-even point.
Example
A t-shirt company with $8 variable cost per shirt (fabric, printing, packaging) selling at $20 has a $12 contribution margin per shirt.