Variable costs explained

London Chinatown -- StoreVariable costs are costs that change with sales volume.  The greater your sales, the greater your variable costs.

I’ll continue using the example of a candy store from my fixed cost post.  I previously explained that fixed costs are do not change with sales volume, such as rent or utilities.  In that same candy store, the greatest variable cost would be the cost of the actual candy itself.  The more candy you sell, the more candy you have to buy and pay for.  I

The manager should understand their business’s cost behavior – what costs are variable and what costs are fixed.  I’ll give you some examples.

A Taxi driver earns sales revenue based on mileage (mostly).  The more they drive, the more they earn.  Therefore, gasoline would be a variable cost.  Suppose that a taxi driver leases the car.  Monthly lease payments would be fixed.

An airline earns sales revenue based on the number of passengers taking flights.  Whether an aircraft is 90% full or 90% empty, it will use about the same amount of fuel to fly from New York to Los Angeles.  Therefore, jet fuel would be a fixed cost.  What costs would be variable?  Peanuts.  The more passengers who fly, the more peanuts that the attendants will need to distribute.

Having more variable costs (in relation to fixed costs) will make your business more flexible and more capable of successfully dealing with changes in sales volume.  A taxi driver (who has more variable costs) can be more flexible than a an airline (which has more fixed costs).

[Image – London Chinatown — Store by C. G. P. Grey, on Flickr]

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

5 Responses to “Variable costs explained”

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