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description: Learn what variable costs are, how to calculate them, and how they differ from fixed costs. See examples and improve forecasting with Brixx.
title: What is a Variable Cost? Definition, Calculation, & Examples - Brixx
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[Home](https://brixx.com/) » What are Variable Costs? A Simple Guide for Small Businesses 

# What are Variable Costs? A Simple Guide for Small Businesses

#Cash Flow

Jamie Smith|11min read |15 July 2025

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Variable costs are business expenses, like costs of materials and labour, that change depending on how much you produce or sell. Having an understanding of these for your business is essential to ensure good profit and growth.

In this guide, we’ll explain what variable costs are, how to calculate them with a simple formula, and why they matter for small businesses. You’ll also see examples and tips for forecasting variable expenses using tools like Brixx.

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### Track varying business expenses in Brixx

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## What is variable cost?

Variable cost are the business expenses that **vary** **directly** with the level of output or production. In other words, when a business produces more goods or services, the variable cost increases; when it produces less, the variable cost decreases.

Examples of variable costs include raw materials like direct labour costs, and utilities associated with the production process, like electricity or water usage.

## What is the difference between fixed cost, variable cost, and marginal cost (with examples)

**Summary**: Fixed costs are constant and remain the same regardless of output; variable costs fluctuate with production levels; marginal costs represent the expense of producing one additional unit.

### Variable cost

Variable costs are business expenses that change in proportion to the level of output or production. As production increases, variable costs increase; as production decreases, these costs decrease.

#### Variable costs examples:

* **Cost of raw materials**: The cost increases with increased production.
* **Direct labour costs**: More labour hours are required when production levels increase.
* **Utilities**: Higher levels of production often require more power, water, or gas, increasing utility costs.
* **Packaging and shipping costs**: More units produced and sold mean more costs for packaging materials and delivery expenses.

### Fixed cost

Fixed costs are expenses that do not change with the level of output or production. These costs are constant, regardless of how much a business produces or sells.

#### Fixed costs example:

* **Rent**: The cost of renting a space for business operations doesn’t change with the level of production.
* **Salaries**: Many staff salaries are fixed and do not change with the level of production.
* **Insurance**: The cost of insuring a business or its equipment remains the same, no matter how many units are produced.
* **Depreciation**: This is the loss of value of assets over time, and it is also a fixed cost as it does not change with the level of production.

### Marginal cost

Marginal cost are the costs of producing one additional unit of a product. It is the different in the [total cost](https://brixx.com/total-cost-definition-and-formula/) that arises when the quantity produced changes by one unit.

#### Marginal costs examples:

* **Manufacturing an additional unit**: For instance, in a computer factory, the cost of raw materials, labour, and utilities necessary to produce one additional computer is the marginal cost.
* **Publishing an additional book**: The cost of editing, designing, printing, and binding one more copy of a book is the marginal cost.
* **Preparing an additional meal in a restaurant**: The cost of ingredients, labour, and utilities for preparing one more meal is the marginal cost.

## How to calculate variable costs

Calculating variable costs involves identifying all the costs that vary directly with the level of production, then adding them up. Here’s a step-by-step process:

* **Identify variable costs**: The first step is to identify all the variable costs associated with the production. These might include costs like raw materials, direct labour costs, packaging, and utilities used in the production process.
* **Determine variable cost per unit**: Once all variable costs are identified, calculate the variable cost per unit. This might involve dividing the total cost of each variable element by the total quantity of units produced.
* **Calculate total variable cost**: Finally, multiply the variable cost per unit by the total quantity of units produced to calculate the total variable cost.

## Variable cost formula

**Variable Cost = Total quantity of output x Variable cost per unit**

This formula implies that variable costs are determined by the quantity of output and the variable cost of producing each unit.

![Variable cost formulas](https://brixx.com/wp-content/uploads/2023/07/Variable-cost-formula-e1693829128934.png)

## Examples of calculating variable cost

![variable-cost-example](https://brixx.com/wp-content/uploads/2023/06/variable-cost-example-1024x683.webp)

Suppose a company manufactures pens. The cost of materials for each pen is £1, and the labour cost per pen is £2\. The company wants to produce 1000 pens.

Using the formula:

**Variable Cost = Total quantity of output × Variable cost per unit**

The calculation would be:

* Variable Cost = 1,000 pens × (£1 material cost + £2 labour cost)
* Variable Cost = 1,000 × £3
* Variable Cost = £3,000

So, the variable cost of producing 1,000 pens is £3,000

## Why is variable cost important to business?

Variable cost is an essential concept in business for several reasons:

**1\. Pricing and profitability**: Understanding variable costs helps businesses set product [pricing strategy](https://brixx.com/find-the-right-type-of-pricing-strategy/) accurately. By knowing the cost of producing each additional unit (i.e., the variable cost), businesses can price their goods or services to cover these costs and ensure profitability.

**2\. Financial planning and budgeting**: Accurate forecasting of variable costs is crucial in budgeting and financial planning. As these costs fluctuate with changes in production volume, understanding them allows businesses to plan for various production scenarios effectively.

**3\. Cost control and efficiency**: Identifying variable costs allows businesses to find ways to reduce these costs and improve efficiency. For instance, a company could negotiate better rates with suppliers to reduce raw material costs or invest in technology to lower labour costs.

**4\. Decision making**: Variable costs are vital in various strategic decisions, like determining whether to increase production, enter a new market, or launch a new product. Understanding these costs aids in conducting a [break-even analysis](https://brixx.com/what-is-break-even-analysis/) or profitability analysis.

**5\. Performance evaluation**: Changes in variable costs can provide insights into operational efficiency. For instance, if variable costs per unit increase, it might indicate issues with production efficiency or supplier pricing.

![variable cost definition](https://brixx.com/wp-content/uploads/2023/06/variable-cost-definition-scaled-e1687256094241-1024x489.jpg)

## Master your business variable cost analysis with Brixx

Understanding variable costs and their role in your business can pave the way for smart decision-making and enhanced profitability. But you don’t have to do it alone.

Brixx can assist you in navigating the complex landscape of business finance. With our platform’s [powerful planning and forecasting tools](https://brixx.com/), you can accurately project your variable costs and see their impact on your overall business performance. Brixx helps transform your data into actionable insights for strategic planning. Don’t just manage your business finances – master them with Brixx.

To get started, we invite you to take advantage of our [7-day free trial](https://app.brixx.com/sign-up/trial) – no credit card required! Experience first-hand how Brixx can make a difference for your business. Begin your journey with us today!

## Variable cost FAQs

### Is salary a variable cost?

Salaries are generally considered a fixed cost because they typically remain the same each pay period regardless of the level of production or sales. A salaried employee receives the same amount whether the company’s output rises or falls.

However, in some instances, salaries could have a variable component. For instance, if an employee is paid a base salary plus a commission based on sales volume, then the commission part of their earnings is a variable cost. Additionally, in businesses where employees are paid on a piece-rate basis (they are paid a specific amount for each unit they produce), their earnings could be considered a variable cost because their total earnings vary with the number of units they produce.

So, while salaries are usually considered a fixed cost, the nature of the payment agreement could introduce a variable component.

### Can advertising be considered a variable cost?

Advertising can be both a fixed or variable cost, depending on the nature of the expenditure. If the advertising cost changes with the level of production or sales, such as a commission-based advertising agreement, it is a variable cost.

### How does the concept of variable cost relate to economies of scale?

Economies of scale occur when increased production leads to a decrease in the per-unit variable cost. This is because some costs, like the purchase of raw materials in bulk or the efficient use of production machinery, can decrease per unit as volume increases.

### How are variable costs treated in accounting? 

In accounting, variable costs are typically included in the cost of goods sold (COGS) on the income statement. They are subtracted from sales revenue to determine gross profit.

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