What Is Variable Cost

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Businesses often wonder what are the variable cost and how they can benefit from it. Many variables are involved in any business venture. These variables are ones that change according to factors like demand, supply, price and other things.

Variable costs pertain to those costs that go up and down as the amount of output increases or decreases. Some examples of variable cost companies are factories, warehouses, distribution centers, and transportation modes. Variable costs are just the whole range of the variable costs associated with production. They do not consist of only one element. In some cases, a variable cost company may include labor, material and overhead. Variability in prices may result from the fact that supply and demand in any market are unpredictable.

On the other hand, a fixed cost basis has no pre-determined variables. The price or cost of a product is set at the beginning of the process, regardless of what is produced and how much is sold. In this case, there is no way to determine what is variable or what is fixed. This kind of cost base is referred to as a direct cost base. It refers to costs that are caused by raw materials, labor, and overhead. This type of cost has no allowance for demand or supply.

Variable cost what is variable cost companies use when determining their prices or charges. This is because the price or charge cannot be predicted in any situation. It can only be estimated. If the company sells ten units today and gets one unit tomorrow, it would be difficult to say whether the price changed since yesterday.

Fixed cost what is variable is often used by companies that produce raw materials in large quantities. When a company buys a lot of steel wool today and sells a lot of steel wool tomorrow, the price will not change because it can be assumed that the demand for steel wool will increase tomorrow. However, if the demand for steel wool is decreasing, then the price of steel wool will decrease. Companies that have fixed costs base their pricing on historical averages so that they can predict with some accuracy what is a variable cost.

How do fixed cost companies determine what is the variable cost? They take their earnings from their products and divide it by the number of units that they sell. This number, known as an assumption, tells them what their cost will be for each unit sold. For instance, if they expect to make fifty units of widgets in one week and sell thirty units per week, their assumption should be based on fifty widgets per unit. Using these assumptions, they come up with what is a variable cost.

The other way to determine what is the variable cost is to add up what they expect to pay for each unit sold and divides it by the number of units that they expect to sell that week to get the average cost per unit. Again, this will be an assumption based on historical averages, but it will give you a good idea of what is the variable cost for your business. This is also very helpful when determining which expenses are recurring and which are not.

If you are wondering what is the variable costs, you need to ask yourself if your business is dependent upon sales trends, such as the state of the economy, that will affect what is a variable cost. Does your business rely on one product or do you make a variety of goods that you can change according to what is going on in the market. Is your business seasonal? Are you dependent on one supplier or are you diversified? Knowing the answers to these questions can help you decide what are the variable cost and what is fixed cost.