Variable Costs Examples, Formula, Guide to Analyzing Costs

what is a variable expense

This way, you’ll know exactly how much cash you have to cover these shifting expenses. An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity. In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases.

what is a variable expense

It’s hard to feel in control of your finances when many costs are out of your hands. Fixed expenses such as car payments generally stay the same, but variable expenses change over time. Your personal finances are not the only place you may encounter variable expenses. In a small business, a the main specific features of double entry bookkeeping system variable cost is an expense that changes according to production or, in some businesses, with changing weather conditions. Other ways of budgeting for unreliable variable expenses could include zero-based budgeting where you assign every dollar from your income toward expenses and savings.

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With proper planning, even very volatile expenses won’t have to derail your business plans. Fixed expenses are very predictable because they’re the same every month. This could include items such as rent or mortgage payment, car payment, gym membership, or subscription services. Cellphone (if you have an unlimited plan) and internet bills, childcare, and insurance premiums are other examples of fixed expenses. Trimming variable expenses is more difficult than cutting discretionary spending.

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. The costs increase as the volume of activities increases and decrease as the volume of activities decreases.

Water, gas and electric bills technically fit under the umbrella of basic living expenses. But these costs can fluctuate from month to month, depending on your usage and the rates your provider charges. Just like consumers, businesses also have variable and fixed expenses. Costs can vary due to price changes — say, if your city’s bus fare increases — or because of how much of something you buy and how often you do so. For example, say your neighborhood bakery is famous for its $1 mini muffins.

Set expense limits and find ways to save

But the advantage of doing so is that you end up with a balanced budget without the risk of racking up high-interest debt. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Our partners cannot pay us to guarantee favorable reviews of their products or services. It’s important to track your spending so you know where your money goes and can plan accordingly.

  1. You might normally treat yourself to one muffin each week, spending $4 on average per month, but some months you might indulge more and spend $10 or $15.
  2. Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces.
  3. Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments.
  4. This assumes, of course, that you’re able to pay the balance off in full before the promotional rate ends.
  5. The costs of keeping your home at a comfortable temperature rise as the weather gets more extreme.

Another example of a variable expense is a retailer’s cost of goods sold. For instance, if a company purchases a product for $30 and is able to sell it for $50, the company’s cost of goods sold will be a constant rate of 60% ($30 / $50). Therefore, when the company has sales of $10,000 the cost of goods will be $6,000.

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But the amount you pay in any given month could be different from previous payments or ones you’ll make in the future. While they may not be necessary for basic needs, certain recurring subscriptions could also be included as fixed expenses in your budget. If you pay for a gym membership or streaming services, for example, those costs might stay the same month to month. As with all expenses, find out how variable expenses affect your overall financial health. First, track your monthly spending and deduct the total from your income. Ideally, you’ll have money left over rather than a zero or negative balance.

When you sit down to make your monthly budget, you don’t have to guess how much you’ll pay toward fixed expenses. If Amy were to shut down the business, Amy must still pay monthly fixed costs of $1,700. If Amy were to continue operating despite losing money, she would only lose $1,000 per month ($3,000 in revenue – $4,000 in total costs). Therefore, Amy would actually lose more money ($1,700 per month) if she were to discontinue the business altogether. If Amy did not know which costs were variable or fixed, it would be harder to make an appropriate decision. In this case, we can see that total fixed costs are $1,700 and total variable expenses are $2,300.

When setting prices, you should ensure that at least the variable expenses are included in the price. That way, a business will not lose money when each unit of a product is sold. If you want to save money on variable expenses, it may require some lifestyle adjustments. For example, cutting back https://www.bookkeeping-reviews.com/shyanne-women-s-xero-gravity-embroidered/ or cutting out things like dinners out or new clothes are some simple ways to save. You could also save on groceries by planning meals, taking advantage of coupons or switching from name brands to generic. With debt repayment, you may be able to save by refinancing or consolidating bills.

You might normally treat yourself to one muffin each week, spending $4 on average per month, but some months you might indulge more and spend $10 or $15. Knowing how to include both in a budget is important to avoid overspending. It can also help with deciding how much of your income to commit to debt repayment, saving and other financial goals. Knowing how costs behave when sales or other activities change will allow you to better understand how a company’s gross profit and net income will change.

Example of Variable Costs

Saving can also be considered a fixed expense if you’re budgeting for it regularly. If you do that consistently and include it as a line item in your budget, you may technically consider it to be a fixed expense if you don’t deviate from your savings habit. The cost of gas and certain utilities such as electricity and water depend on how much you consume and changing rates. Other examples include clothing, vacation costs, holiday gifts and eating out.

A variable expense is an ongoing cost that changes from month to month. In simple terms, it’s one that typically doesn’t change month-to-month. And, if you’re wondering what is a variable expense, it’s an expense that may be higher or lower from one month to the next. For example, Amy is quite concerned about her bakery as the revenue generated from sales are below the total costs of running the bakery. Amy asks for your opinion on whether she should close down the business or not. Additionally, she’s already committed to paying for one year of rent, electricity, and employee salaries.

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