Variable Cost Examples
The nature of variable cost examples themselves can vary widely. For instance, some companies might list labor as a variable cost, particularly if it hires temporary staff on a regular basis. A construction company, on the other hand, might list lumber as a variable expense, since the amount of wood it purchases will vary according to the number of jobs the company takes.
While the expenses themselves may differ, the formula for calculating these costs generally remains the same. Total variable cost is calculated by multiplying the total output by the variant price per unit of that output (e.g. total variable cost=total output variable cost per unit). This formula also requires documentation of the total raw material cost and direct labor cost for the production of a certain quantity of output. This is typically calculated over a specific time period, most often annually.
Clothing Manufacturer Example: Part 1
For example, imagine that a clothing manufacturer has received an order for 10 custom made dresses at $2,000 a piece. The company normally only produces about 30 custom dresses a year, and it wants to determine the gross profit that will arise from this one time-consuming job. The company knows that they spend $9,000 annually to cover the raw materials necessary to design these dresses, and $24,000 in direct labor costs. With this preliminary information, the company can begin to calculate variability and profit.
Clothing Manufacturer Example: Part 2
To determine gross profit, the clothing company must first calculate the variable cost per dress by dividing the number of dresses by the cost of materials and labor. Doing this, the raw material cost per dress would come out to be $300 (9,000/30) and the labor cost would be $800 (24,000/30). Using the above formula, total variable cost would be computed as follows: 10 (number of requested output of dresses) $1,100 (total labor and material) = $11,000. If the company charges $20,000 for 10 dresses, they can then expect to make a profit of $9,000 ($20,000-$11,000).
Tracking Variable Expenses
An extension of variable cost examples also shows how easily a company’s variable expenses might become a liability. For example, imagine what would have happened if the company had decided to spend an extra $3000 total on embellishments and additional labor, thus significantly adding to total variable cost. This could be particularly risky if the company then sold only 25 dresses that year instead of 30. This would further decrease revenue. For this reason, it is important to carefully track these costs and weigh them against market risks.
Total Variable Cost vs. Variable Cost per Unit
Despite what is suggested by the terminology, variable costs per unit actually remain constant over time. It is only the total variable cost that demonstrates frequent fluctuations. For example, the total variable cost in the initial example of the clothing manufacturer will change with an increase or decrease of total output. However, regardless of whether the company produces 30 dresses or 100 dresses, the variable cost per dress will remain $1,100.
These variable cost examples reflect total costs before the inclusion of any fixed rates. For example, while the clothing company might spend a total of $33,000 in annual variable costs, it does not include the other necessary costs that would be needed to run the business. Examples of fixed rate costs include water and electricity. This is paid regardless of the volume of production.