Dictionary - Variable Costs

Definition

Costs that are dependent on the quantity of output produced. Variable costs have to be paid only if production is above zero.

Example

To give an example, think of an ice cream seller. The costs associated with the purchase of ingredients for the production process (milk, sugar, etc.) are considered variable costs. Those purchases are not necessary if production volume is zero. Furthermore, if the seller produces more ice cream he will naturally need a higher quantity of ingredients. 

Relevance

Variable costs are an important aspect when it comes to making production decisions. Since they increase or decrease depending on the production volume, per unit variable costs will generally not change for different outputs. As a result, changes in variable costs can have significant effects on profit margin and should always be considered and closely monitored.

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