What are variable costs?

Variable costs refer to expenses that fluctuate in direct correlation with the level of production or sales volume. This means that as a company produces more goods or offers more services, the variable costs—such as raw materials, direct labor required for production, and sales commissions—will increase. Conversely, if production decreases, these costs will also reduce, illustrating their variable nature.

Understanding variable costs is crucial for businesses in setting prices, budgeting, and forecasting profitability, as these costs directly impact the overall cost of goods sold and influence strategic decision-making.