3 Ways to Calculate Variable Costs

how to calculate variable expenses

Conversely, the variable expense ratio can be calculated using the contribution margin. Based on the insights derived from the metric, a company’s management team can set pricing rates and production scheduling appropriately to maximize its profit margins. Entrepreneurs can determine what is the break-even point and when to invest more in business by knowing the average variable cost (AVG). By analyzing how much is spent on producing the product, a manufacturer can set the price for retail so that the company can break even and make profits on the sale of these goods. Essentially, if a cost varies depending on the volume of activity, it is a variable cost. High operating leverage can benefit companies since more profits are obtained from each incremental dollar of revenue generated beyond the break-even point.

how to calculate variable expenses

How to Find Variable Costs Per Unit?

Therefore, businesses often calculate their total variable cost per unit to determine the minimum price at which a product can be sold to break even. If you are curious about how to calculate variable expenses to manage manufacturing expenses, then it is an efficient way to find variable costs by the total variable cost calculator. Controlling the average variable cost per unit goes to decrease with mass production. Businesses do want to increase their production as same unit mass production decreases the average total variable cost of the production. Next, multiply the total quantity of output by the variable cost per unit of output.

Example of Variable Costs

  1. In general, a company should spend roughly the same amount on raw materials for every unit produced assuming no major differences in manufacturing one unit versus another.
  2. Variable costs are commonly designated as COGS, whereas fixed costs are not usually included in COGS.
  3. The direct cost method calculates all the direct variable costs that go into producing a unit or the total units and does not consider any fixed costs such as rent, salaries, machinery or depreciation.
  4. Since variable costs are tied to output, lower production volume means fewer costs are incurred, which eases the cost pressure on a company — but fixed costs must still be paid regardless.

In this article, you will learn about the different types of variable costs, including semi-variable ones. You will also learn how to calculate variable costs in Google Sheets, to find the total and the average variable costs. To learn more about fixed costs and how to calculate them, check out our related article on How To Find Fixed Cost. Lower fixed costs result in a lower are sales discounts reported as an expense break-even point, making it easier for businesses to generate profit. Therefore, transferring fixed costs into variable costs can reduce the unit production required to exceed the break-even limit. Variable costs are a direct input in the calculation of contribution margin, the amount of proceeds a company collects after using sale proceeds to cover variable costs.

What are Examples of Variable Costs?

All of this means increasing leverage by focusing on overhead costs has the potential to yield large returns for a business. However, this only works if a business’s output reaches levels to offset the initial investment in purchasing the machinery. When you process credit cards and debit cards in your business, you pay a fee for credit card processing services.

There are costs that are often considered fixed but can become variable after a certain threshold has been reached, or they have a variable component. Electricity consumption is probably the most relatable example of this concept. Although you may pay a monthly rate for the service – clearly a fixed cost – your electricity consumption will likely increase as production does – a variable cost. While the cost of goods sold (COGS) is often considered a variable cost, as it increases with an increase in production, there are elements in COGS that are fixed costs. A sales commission is a variable cost; it increases as a proportion of your business’s output. If a salesperson makes an additional sale, they receive a commission from your business.

We will go into the details of variable costs, the examples of variable costs and calculating variable costs for your business with examples. Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary depending on the volume of activity.

how to calculate variable expenses

The variable expense ratio is 40%, which we determined by dividing the selling price per unit by the variable cost per unit. Examples of variable costs are human labor, electricity cost, production, or manufacturing cost, and inventory cost. For example, let’s say you operate a manufacturing operation; you will use more electricity, water, and other utilities when your production increases.