As a business owner, there are a lot of budgets that you have to take care of. One of the budgets that you must record, is the variable cost (Variable cost). So what is a variable cost? If you are not sure about this type of budget. Please refer to the article content below.
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What is a variable cost?
Variable Costs are budget items that will change their share of the total budget for producing a product/service as output changes. The price of a business will be caused by fixed costs (fixed budget, unchanged) and variable costs.
Variable prices or variable costs will often change over time. It will include fees associated with direct production and business activities such as raw material budget, production energy budget, direct production labor budget, packaging budget, box packaging, etc. Product sales commission…
In other words, variable costs are costs that change in total with a change in the level of activity of the organization (typically county product volume).
Usually, the relationship of an expense. Depends on how it changes as activity levels change.
In market theory, a firm leaves the market if in the short run it does not earn enough total revenue to cover its total variable costs. If it generates enough total revenue to cover its total variable costs and part of its total fixed costs, it will continue to produce for a while, even though it may incur a loss.
When does variable cost appear?
As mentioned, this budget is tied to the business activities of the enterprise. And proportional to the fluctuations in the activity level of the business.
So, variable costs are incurred only when there are activities (daily activities will often happen when we do business). When the company or business has no activities, the variable cost is now at 0.
What is the variable cost classification?
Variable costs can be classified into the following categories:
Linear variable cost
A linear variable cost is a variable cost that is directly related to the level of activity. This budget type will include direct materials, direct labor, and product sales commissions.
Material cost for shirt products of a Garment Company is a linear variable cost. Assume, each shirt currently has an average material budget of 100,000 Pesos. This cost will increase and decrease linearly with the number of shirts sold to the customer. If the number of shirts is doubled, from 1,000 to 2,000. The total cost of raw materials also doubled, from PHP 100,000 to PHP 200,000.
Then the unit variable cost will not change even though the level of activity changes.
Level variable cost
Hierarchical variable costs are costs that change only when the level of activity changes significantly and clearly. When the activity level changes little or not much, this type of budget will no longer change
Indirect labor costs, machine maintenance costs, etc. are variable costs of this type.
On average, your company has 6 employees to check product quality for a production line with a salary of 5000/month. If the production scale is expanded to add one more line, 12 inspectors are required. Thus, the rental budget will be 12 * 5 = 60000. If the production line expands further, the number of employees will increase and the budget will continue to increase.
This is called the corporate level budget. This price increases when the level of activity exceeds scale.
Curved variable cost
While studying variable budgets. We all assume there is a truly linear relationship between variable costs and output.
But financiers have pointed out that many real-world variable budgets behave in a curvilinear fashion. Does not show a linear relationship between cost and activity level.
Above is all the information for you to understand more about variable cost – what is a variable cost? Although variable costs are associated with business activities. But if you master it, you still have the flexibility to control and adjust this type of budget. Support for a simple, more profitable business.