Typical or Average Variable Costs

What are typical or average variable costs?

On the previous page you were advised to classify all of your small business operating expenses as variable or fixed. Before you do that take a look at examples of typical variable costs.

A Definition

Variable costs are expenses that vary in relationship to the volume of activity of a business.

Basically this means that as the business activity increases, the cost increase in direct proportion to the increase in activity. If the business activity decreases, so do the variable costs.

Examples of Variable Costs

For a manufacturing business the variable costs would include things like:

• Raw materials,
• Production labor,
• Machine running costs,
• The cost of incoming freight, and
• Packaging and distribution costs.

The variable costs for a retail business might include things like:

• The purchase cost of inventory items,
• Cost of incoming freight,
• Sales commissions, and
• Packaging and distribution costs.

Why are Variable Costs Important?

The behavior of these costs always changes in the same way and always in direct proportion to changes in volume.

Variable costs are also sometimes called Direct Costs or Unit Level Costs, because they are generally the only costs that can be directly traced to the product or service your business creates and provides.

The cost per unit remains pretty much static, subject to intermittent price increases.

Unlike fixed costs, where the amount (of fixed cost) attributed to each unit of product varies depending on the activity level of the business.

Information to collect about your Variable Costs

When you have identified which of your operating costs are variable costs, you should take note of the following characteristics of each item that you purchase:

• The unit price - what you pay for it
• The unit of measure - how you buy, do you buy one or do they come in a packet of 100?,
• The unit quantity - if you do buy in 'lots', how many do you get in each lot.

If you would find a template helpful click on this link to a template that you can download or print.

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