What are variable costs?

Variable costs are expenses that change in direct proportion to the level of production or sales volume. This means that as production increases, variable costs also increase because more resources, materials, or labor are used to produce goods or services. Conversely, if production decreases, variable costs will also decrease, reflecting the reduced need for inputs. Examples of variable costs include raw materials, direct labor costs related to production, and sales commissions, which all fluctuate based on the number of units produced or sold.

Understanding this concept is crucial for businesses as it helps in budgeting, forecasting, and analyzing profitability. Businesses aim to manage their variable costs effectively, as they directly impact their overall financial performance and decision-making processes.