Variable cost definition

A variable cost is a business expense that changes in direct proportion to a company's level of activity. It is the cost attached to producing each additional unit of output.

When production or sales rise, variable costs rise; when they fall, variable costs fall. Common examples are raw materials, packaging, shipping, sales commissions, and direct labour. Per unit the cost stays roughly constant, while the total scales with volume.

A variable cost is the opposite of a fixed cost. A fixed cost, such as rent or salaried pay, stays the same whatever the output level, at least over the short run. A variable cost carries no charge when nothing is produced and grows with every extra unit, which is why the two behave very differently in break-even and margin analysis.