Which of the following are the best examples of variable costs for a business?
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Every business must contend with a broad range of costs and expenses associated with startup, operations, and growth. Some of these costs remain relatively constant over time. For instance, unless you’ve moved or signed a new lease, the cost of rent for storage or manufacturing facilities will stay the same. Show
However, other costs can vary significantly as your business grows. These are called variable costs. In this guide, you’ll learn the definition of variable cost, how to calculate variable cost, and how variable costs can impact the profitability of your business. What is variable cost?Variable cost is a business expense that rises or falls in direct proportion to production volume. The more goods a company produces, the higher variable costs become, and vice versa. Common variable cost examples include:
While total variable costs change based on production volume, the variable cost per unit produced remains constant. Variable cost vs. fixed costVariable and fixed costs both represent key expenses of running a business. However, while variable costs change depending on production, fixed costs remain the same even as production and sales volume changes. Common fixed cost examples include:
Variable and fixed costs are key elements of break-even analysis, which helps businesses determine what they need to do or produce in order to make a profit on their initial investment. Variable cost vs. marginal costWhile variable cost often measures the cost to produce each unit, marginal cost considers the total cost of production (including both fixed costs and variable costs) to find the cost of producing one additional unit with the goal of maximizing efficiency in the manufacturing process. How to calculate variable costWhere fixed costs are simply added together to find a company's total fixed costs, variable costs must be multiplied. The formula to calculate variable costs is: Total variable costs = production output x variable cost per unit For example, the total variable cost for 10,000 units produced at a per-unit cost of $2.57 would be $25,700. (This cost per unit is often referred to as average variable cost, as it’s calculated by dividing total variable cost by the number of units produced). Impact of variable costs on profitabilityVariable costs can have a significant impact on the profitability of a business. For instance, a business with higher variable costs relative to fixed costs is likely to have more consistent profitability. That’s because the break-even point is lower, due to lower fixed costs, and higher variable costs yields lower profits per unit sold. In addition, a company with higher variable costs can bear economic downturns more easily by reducing production. Conversely, a company with a higher proportion of fixed costs to variable costs requires a significant upfront investment, but will likely enjoy lower competition and higher profits once fixed costs are covered. That’s because once break-even is achieved, profits are higher per unit, thanks to lower variable costs. The one variable cost you may have difficulty negotiating is direct labor costs. One strategy for reducing those costs is to switch to a payment-per-piece produced, rather than an hourly wage. That way, labor costs are truly tied to production. Variable costs and economies of scaleWhile variable costs generally increase with more production, it's possible to lower variable costs by achieving economies of scale. For instance, by focusing your manufacturing on fewer products, you can save on costs associated with running multiple product lines, including sourcing materials, maintaining equipment, and managing different business units. In addition, as your production volume increases, you gain leverage to negotiate more competitive prices for variable costs like raw materials and shipping, further decreasing your variable cost per unit. Variable cost FAQWhat is a variable cost example?Examples of variable costs include raw materials, sales commissions, packaging and shipping, manufacturing labor, and credit card fees. What is another name for variable cost?Variable cost is sometimes referred to as “unit-level cost” because it varies per unit of output—that is, according to the number of units produced. Is salary a variable cost?A worker’s salary can be a variable cost if their pay changes with increased production or sales. For instance, compensation for workers who are paid per piece or salespeople who earn a commission on each unit sold would be considered a variable cost. Is electricity a variable cost?Bills for utilities like electricity may increase when production goes up. However, these are still generally categorized as fixed costs because a business must pay a base amount no matter how many goods it’s producing. Topics: Backoffice Join 446,005 entrepreneurs who already have a head start.Get free online marketing tips and resources delivered directly to your inbox. Email addressSubscribe No charge. Unsubscribe anytime. Thanks for subscribing.You’ll start receiving free tips and resources soon. In the meantime, start building your store with a free 3-day trial of Shopify. Which of the following is best example of a variable cost?Examples of variable costs are sales commissions, direct labor costs, cost of raw materials used in production, and utility costs.
What is the example of variable cost?Variable cost is a production expense that increases or decreases depending on changes in a company's manufacturing activity. For example, the raw materials used as components of a product are variable costs because this type of expense typically fluctuates based on the number of units produced.
Which of the following is an example of variable costs for a business quizlet?What are examples of variable costs? Cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, and selling and administrate costs such as commissions and shipping costs. A measure of whatever causes the incurrence of a variable cost.
What are 4 common variable expenses?Health, disability or life insurance premiums. Property taxes. Childcare expenses. Student loan or car loan payments.
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