Variable costs

Variable costs ⇒ are costs such as material and labor (among production costs) or shipping-out costs (among period costs) that are incurred only when the activity takes place.

The per unit variable cost remains unchanged as the activity increases or decreases while total variable cost increases as the activity level increases and decreases as the activity level decreases.

Because discounts are often received when more units are purchased, it may appear that variable costs per unit decrease as activity increases.

However, companies do not order units of production inputs one at a time. As part of the budgeting process a company determines how many of a particular input it will need to purchase during the year, and the cost per unit for that quantity of inputs is used in the budget. Therefore, budgeted variable costs per unit do not change as the production levels change for the company

Variable costs are incurred only when the company actually produces something. If a company produces
no units (sits idle for the entire period), the company will incur no variable costs. Direct material and direct
labor are usually variable costs.

• As the production level increases, total variable costs will increase, but the variable cost per unit will remain unchanged.
• As the production level decreases, total variable costs will decrease, but the variable cost per unit will remain unchanged.

The selling price per unit minus all unit variable costs is equal to the unit contribution.

The unit contribution is the amount from each sale available to cover fixed costs or to generate operating income after the fixed costs have been covered. Contribution margin is a measure of contribution as a percentage of the sales price.