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Variable Cost

Definition - What does Variable Cost mean?

Variable costs are the costs of business production that increase and decrease based on the output of goods and services. Variable costs differ from other business costs, referred to as "fixed costs'', which do not vary month to month and can include rent, insurance and business supplies. Fixed costs can also refer to capital costs, including all the structures, buildings, vehicles and machinery needed for production.

The total costs for a company are comprised of both variable and fixed costs, which are both economic costs of producing a product or providing a service.

Justipedia explains Variable Cost

Businesses commonly focus on increasing profits by increasing sales, but do not consider that increased sales may also mean increased variable costs. Instead, the goal of a business ought to be to focus on increasing the profit margin, which could mean eliminating the least cost-effective products or services.

Businesses that are hoping to cut costs should first review whether they can reduce their variable costs, including costs of the workforce and advertising. For example, could one employee do the work that is currently done by two? Is there a more efficient method of production? Could any business activity be outsourced? Does eliminating a variable cost affect the bottom line?

Businesses must also be aware of the concept of step-variable costs. For example, it may be possible to decrease certain costs, such as labor, without lowering the ability to meet the sales volume demand.

Finally, the most important step to controlling variable costs is to track costs and expenses. Set a monthly and annual budget and scrutinize your expenditures. If your costs continue to be too high, it may be time to talk to a professional. Many financial professionals have helped companies analyze their cost structure and set competitive pricing for their products.

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