Variable costs - What do variable costs mean? Read more here

Learn about variable costs in accounting and eCommerce. Get an introduction, understand how they are used and see a practical example of calculation

A guide to understanding variable costs: the key to better pricing and profit optimisation

What are variable costs?

Variable costs are expenses that fluctuate based on the level of production or sales. This means that these costs increase as you produce or sell more, and decrease when you produce or sell less. Examples of variable costs include raw materials, packaging, and shipping costs. They are the opposite of fixed costs, which remain the same regardless of how much you produce or sell.

How are variable costs used in accounting?

In accounting, it's important to distinguish between variable and fixed costs because it helps you understand your company’s cost structure and profitability. Knowing your variable costs allows you to calculate how much it costs to produce one unit of your product, which is crucial for pricing and profit margin decisions.

One of the key areas where variable costs come into play is in contribution margin. The contribution margin is the difference between the selling price and the variable costs per unit. It tells you how much of each sale is available to cover fixed costs and generate profit.

Example of calculating variable costs

Imagine you run a webshop that sells T-shirts. Let’s look at a practical example:

Why are variable costs important?

Understanding your variable costs helps you make informed decisions about pricing, production, and sales. It allows you to analyze how much you need to sell to cover your costs and start making a profit (break-even point). Additionally, it can help you identify areas where you can reduce costs and increase profitability.

Tips for managing variable costs

Here are some tips for effectively managing variable costs:

• Monitor Regularly: Keep an eye on your variable costs to ensure they don’t increase unexpectedly.
• Negotiate with Suppliers: Try to get better prices on raw materials and shipping to lower your variable costs.
• Streamline Production: Find ways to make your production process more efficient to reduce waste and costs.
• Pricing Strategy: Ensure that your prices cover both variable and fixed costs while providing a good profit margin.

Learn about variable costs in accounting and eCommerce. Get an introduction, understand how they are used and see a practical example of calculation