Variable expense definition
/What is Variable Expense?
A variable expense is a cost that alters in conjunction with some type of activity. For example, a business only pays a sales commission to a salesperson if that person completes a sale transaction; therefore, the commission is a variable expense. A business that has a high proportion of variable expenses can usually generate a profit on a low sales level. The reason is that there are few fixed expenses to be paid for in each month, making it easier to achieve a breakeven sales level.
When setting prices, you should ensure that at least the variable expenses are included in the price. That way, a business will not lose money when each unit of a product is sold.
Examples of Variable Expenses
The main type of variable expense is direct materials expense, since it increases as sales increase. Other variable expenses are commissions , billable labor, piece rate labor, and credit card fees. In all cases, these expenses are only incurred when some sort of activity is conducted, such as a product sale or a manufacturing process.
Variable Expenses vs. Fixed Expenses
Fixed expenses are fixed within a certain activity range. For example, the rent expense for a 30,000 square foot factory remains the same until a new product line is added, after which a new lease must be obtained for the additional amount of square footage needed for the additional equipment.
