# Variable Costs

### What are Variable Costs?

Variable costs are expenditures that increase or decrease with the number of goods or services that a business produces.

Variable costs are also called unit-level costs or short-term costs. They are called short-term costs because unlike fixed costs, they are incurred with every good or service that is produced. If there is no production, the variable cost is zero.

As a business owner it is important to know your variable costs so that you can determine your profitability.

### Variable Costs – Example

For example, let’s say that you own a local printing business, and you have to figure out the total variable costs to produce one advertising flyer.

To print one flyer you know that you need:

• Printing paper = \$1.00 per unit
• Electricity = \$1.00 per unit
• Labour Wages = \$3.00 per unit

So, if you want to figure out the variable costs to produce 25 flyers then you would use this formula.

Total Variable Cost Per Unit = Total Quantity of Output x Variable Cost Per Unit

Here’s how this would apply to our example:

• Printing paper = 25 X \$1.00 per unit = \$25.00
• Electricity = 25 x \$1.00 per unit = \$25.00
• Labour Wages = 25 x \$3.00 per unit = \$75.00

Total Variable Cost Per Unit = \$25.00 + \$25.00 + \$75.00 = \$125.00

It’s worth noting that this does not include what you already have to pay for your fixed costs (printing machine, office, furniture, lighting etc.)

So, if you decide to produce 0 flyers, your variable cost is zero.

The more units you produce, the higher the variable costs and vice versa. 