Short definition: A variable cost is a cost that changes in proportion to the level of production or sales activity.
Explanation: These costs increase or decrease as the volume of production or sales increases or decreases. They are directly related to the production or sales process and can include expenses such as raw materials, direct labor, and sales commissions.
Example: If a company produces 1,000 units of a product and the variable cost per unit is $5, the total variable cost would be $5,000. If the company increases production to 1,500 units, the total variable cost would increase to $7,500.
Additional information (optional): Variable costs are important for businesses to understand, as they can significantly impact profitability. By managing variable costs effectively, companies can improve their margins and overall financial performance.