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Variable Costs

A variable cost changes in proportion to activity but remains constant per unit. If there is an increase in production, there is an increase in variable cost. The variable cost plus the fixed costs equals the total production costs.

Gas costs $4 per gallon. Your SUV gets 10 miles per gallon. How much does it cost to drive each mile?

• $4.00/10 miles = $0.40 per mile

So, if you drive 100 miles at 10 miles per gallon, you will require $40 (10 gallons of gas x $4.00). If you drive 1,000 miles at 10 miles per gallon, you will require $400 (100 gallons of gas x $4.00).

The more miles driven, the more gas used and the more money spent. But the cost per mile stays the same; this is a variable cost. It varies with how much you drive.

Examples of variable costs include:      

• direct materials,
• direct labor, and
• sales commissions.

Examples of variable costs and the activity bases that drive them include:

• fuel costs (which vary with the number of miles driven) and
• tax preparer revenue (which varies with the number of tax returns completed).