Posted in Finance, Accounting and Economics Terms, Total Reads: 1281
Definition: Variable Cost
Variable cost is a cost which vary with the output i.e. the number of items produced or services offered. A true variable cost will vary in exact proportion with the output. Put in other words, as the revenue increases, variable cost also increases.
Example: For an automobile company, tyres that are sourced for the vehicles will form part of variable costs. As the number of vehicles produced increase, number of tyres required will also increase and hence variable costs will increase.
In case service business, for example, IT outsourcing company, the main vairable cost is the cost of wages for an employee working directly in providing the service. As the number of people increase, the revenue of the company also increases linearly.