Dictionary of all accounting terms
Variable costs are business expenses that change in relation to your total production output. These costs will increase or decrease in respect to the volume of goods your company produces.
Some variable costs can be the cost of raw materials used for production, utility expenses, cost of distribution, and sales commissions.
Let's say that it costs $5 for a pizza place to produce 1 pizza. I will not focus on the size of the pizza for this example. $3 are allocated for ingredients and $2 are direct labor costs per pizza produced. A chart below will explain just how variable costs change based on the total output of the pizzeria.
|1 Pizza||3 Pizzas||10 Pizzas|
|Total Variable Cost||$5||$15||$50|
As you can see, the output dictates the pizzeria's total variable cost.