Variable cost

Definition

A variable cost is a cost that changes in total in direct proportion to the level of activity/output (within a relevant range), while the cost per unit stays roughly constant (e.g., RM0.40 per unit).

Facts (core points)

• Total variable cost = Variable rate × Activity level.
• Per-unit variable cost ≈ constant (within the relevant range).
• Common drivers: units produced/sold, labour hours, machine hours, km driven, orders processed.

• Used in CVP/break-even and contribution margin analysis:

Contribution per unit = Selling price − Variable cost per unit.

Elaboration

• Why it matters: Variable costs scale with volume, so they shape margins, pricing, and make-or-buy decisions.

• Types:
• Pure proportional (materials per unit).
• Step-variable (extra temp staff added every 200 orders).
• Mixed/semi-variable = fixed base + variable rate (e.g., RM1,000 + RM0.10 per kWh).

• Relevant range: The “constant per-unit” assumption holds only within capacity limits; bulk discounts or overtime can change the rate.

• Managerial uses:
• Identify scalable costs for short-run decisions (accept special order, stop a product).
• Separate fixed vs variable using high–low, regression, or account analysis.

Tiny numeric illustration

A snack factory uses RM0.60 ingredients and RM0.15 packaging per bag.

• Variable cost/unit = RM0.75.
• Make 10,000 bags → Total variable cost = 10,000 × 0.75 = RM7,500.
• Make 18,000 bags → RM13,500. (Per-unit still ~RM0.75.)

Examples (by context)

Context	Typical Variable Costs	Driver
Manufacturing (electronics)	Direct materials, piece-rate labour, consumables, power per machine-hour	Units, MH
Food & beverage	Ingredients, packaging, delivery bags, sales commissions	Units sold, orders
Retail	Credit card fees, shopping bags, sales commissions	Sales value/volume
Logistics	Fuel, tyres wear, tolls, per-km maintenance	Kilometres/tonne-km
Call centre	Overtime minutes, per-call telecom charges	Calls/minutes
SaaS/Cloud	Usage-based cloud compute/storage beyond base, payment gateway fees	API calls/GB/users
Hotel	Guest amenities, laundry per occupied room, breakfast food cost	Room-nights
University short courses	Handouts, refreshments, adjunct hours per class run	Students/class hours
Archery club	Target faces consumed, arrow fletchings, per-session assistant hours	Sessions/archers

Quick exam tips

1. State the driver and relevant range.
2. Show rate × activity clearly.
3. Distinguish variable, fixed, mixed, step-variable.
4. Link to contribution margin for CVP/break-even.