Variable Cost
Variable cost is a kind of cost that fluctuates according to the amount of production output. Generally, the more a business produces, the more it incurs in variable costs. It includes materials, direct labor and related expenses that fluctuate with production volume, such as wages and supplies. Variable cost is also known as a unit-level cost.
Variable costs are costs that vary with the number of products or services produced. Variable costs change depending on production volume, while fixed costs remain the same no matter how much a company produces. The most common type of variable cost is the direct material cost. Direct material cost is the cost of the raw materials and components used to create the products. It changes as the number of products or services produced changes. Indirect labor cost is another type of variable cost. This cost is related to the labor needed to produce the products or services, such as labor for quality control, engineering and management.
Another type of variable cost is sales commissions. These are costs that fluctuate according to the number of products or services sold. This cost also progresses with time as individuals increase their selling skills, thereby allowing companies to charge a higher commission.
Allocating and measuring variable costs can be challenging because most businesses need to identify and track costs at the individual unit or product level. Resources such as labor and materials that are used to produce those units or products can vary greatly from product to product, making it difficult to group the costs accurately. Additionally, when assessing the costs of a new product, multiple types of information must be tracked and gathered to ensure a comprehensive understanding of the production costs.
Usually, businesses that produce a range of products are better equipped to process and manage variable costs. Accounting systems used by businesses must be able to accommodate individual unit-level cost data, rather than aggregating cost information to the product level. This can be accomplished through the use of detailed cost tracking systems that record costs by individual product or service.
Businesses often use a variety of strategies to manage their variable costs. These strategies include pricing models or production strategies that optimize production outputs and costs. In addition, businesses can also use inventory management systems or cost control systems to manage their variable costs.
In conclusion, managing variable costs is crucial for business success. It requires businesses to have accurate, detailed data on their costs and adjust their production activities accordingly. Additionally, businesses must also use cost-saving strategies to minimize the impact of variable costs on their bottom line.
