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 following can all be classified as variable expenses:
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Direct materials
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Direct labor
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Manufacturing supplies
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Sales commissions
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Electricity for production equipment
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Water use in manufacturing processes
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Freight costs
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Fuel surcharges
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Packaging for shipping
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Credit card processing fees
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Maintenance costs for equipment that vary with usage
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Royalties that are based on sales or usage
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.
