Variable Cost: What It Is and How to Calculate It

If you sell physical products, your shipping expenses will vary depending on the weight and size of the items you’re sending, as well as the shipping distance. You may also incur additional costs if you need to expedite shipping or ship to multiple locations. 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. Or you could rely on the good old envelope budgeting method, creating different envelopes for income and expenses.

If we talk about what are variable expenses, these are the expenses that fluctuate from month to month, such as utilities, fuel, and inventory costs. Variable expenses in a business can also be reduced by using aftermarket consumables. As your level of production or consumption increases, the packaging cost increases as well, including both the cost of packing material as well as consumables.

Restaurant meals, charitable giving and travel are all examples of variable expenses that are generally completely optional. This guide shows you how to calculate variable expenses in your budget and covers everything there is to know about these frequently changing expense categories. 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).

How to Save on Variable Expenses?

There is another type of expense category that’s referred to as “discretionary expenses.” These are “optional” purchases, such as entertainment and restaurants. A variable expense could be an expense that changes month-to-month, like your heating bill. It’s important not only that you have a budget but also that you make an effort to live your budget.

The credit card processor charges the business a fee of 3% of each amount charged. Therefore, if the business has sales of $10,000 in the month of June, the business will have a credit card expense of $300. The total credit card expense varies with sales because the fee has a constant rate of 3% of sales. 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. Variable expenses can include essential expenses as well as discretionary spending.

However, they aren’t an absolute mystery, as there is historical data to help you determine what you can reasonably expect to pay every period. For instance, if you analyze your grocery spending and find that you spent $640 in January, $715 in February and $590 in March, you could add these three numbers together and divide by three. You’d get $648.33, and could safely assume your average grocery bill might be around $650 per month. Variable expenses usually aren’t as predictable, but they often allow more flexibility in your budget. We believe everyone should be able to make financial decisions with confidence. 1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit.

The Difference Between Your Credit Card Closing Date and Due Date

This may hold true for tangible products going into a good as well as labor costs (i.e. it may cost overtime rates if a certain amount of hours are worked). Consider wholesale bulk pricing that prices goods by tiers based on quantity ordered. There is also a category of costs that falls between fixed and variable costs, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded.

When making a budget, it’s important to know how to separate fixed expenses from variable expenses. One of the key ways that accountants and accounting teams think about business expenses is to split them up into variable expenses and fixed expenses. In conclusion, variable expenses play a significant role in determining the effectiveness of a budget.

• If your company produces ceramic flower pots, for example, every pot you make requires a certain amount of clay.
• Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments.
• If you need to start cutting back on costs, look at both your fixed and variable expenses.
• In other words, they are costs that vary depending on the volume of activity.
• Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Raw materials are the direct goods purchased that are eventually turned into a final product. If the athletic brand doesn’t make the shoes, it won’t incur the cost of leather, synthetic mesh, canvas, or other raw materials. In general, a company should spend roughly the same amount on raw materials for every unit produced assuming no major differences in manufacturing one unit versus another. Don’t forget that just because something is done the same way every time doesn’t necessarily mean it’s right.

Variable expense definition

In some cases, an unexpected expense in your variable costs can throw your budget into turmoil. For example, you could fall ill and have medical bills, your car might break down or a scorching summer could dramatically increase your electric bill. For example, using this method you would first budget for your rent, debt repayments, utility bills, basic grocery bill, etc. before budgeting for or spending any money on optional purchases. There are a couple of different types of variable expenses, and the strategies for budgeting for them differ a bit. Assume that a website business sells a product and requires the customer to pay with a credit card.

For instance, if you get sick, then a doctor visit may be a necessity that you need to cover. On the other hand, a discretionary expense means anything you best 360 degree feedback integrations for adp workforce now budget money for or spend money on that you don’t necessarily need. Saving can also be considered a fixed expense if you’re budgeting for it regularly.

Formula and Calculation of Variable Costs

For instance, you may put $100 into your emergency fund every payday. 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. To help you keep your budget in line and protect your cash flow, it is a good idea to have a buffer in your business savings account. You can identify savings opportunities and make improvements to your variable expenses budget by reviewing it annually.

Fixed expenses are a known entity, so they must be more exactly planned than variable expenses. After you’ve budgeted for fixed expenses, then you know the amount of money you have left over for the spending period. If you have plenty of money left, then you can allow for more liberal variable expense spending, and vice versa when fixed expenses take up more of your budget.

While a variable expense has a different cost each month, a fixed expense is an expense you regularly pay that is the same total each time you pay it. Generally, these expenses have a predetermined payment amount set forth in your agreement or contract. If you could use some more breathing room in your budget, finding ways to save each month can help. How you approach saving money can vary, based on whether you’re trying to cut your fixed or variable expenses. Aside from being roughly the same amount each month, fixed expenses may also be paid on or around the same date each month.

• Your electric bill can vary depending on where you live, what heating options you have, and how much electricity is available.
• We’ll help you along the way by explaining what a variable expense is, how to account for it in your budget, some of the risks variable expenses present and how to mitigate those risks.
• You can take the help of workflow software to streamline your workflow and create a productive business environment.
• Utility payments, fuel, automobile expenses and utility bills are some examples of variable expenses.
• For instance, if you analyze your grocery spending and find that you spent $640 in January, $715 in February and $590 in March, you could add these three numbers together and divide by three.

Variable expenses fluctuate from month to month, often increasing as the sale volume or output increases, while fixed expenses such as rent or loan payments stay the same each month. Some examples of variable expenses include utilities, fuel, and inventory costs. You can save money on variable expenses by taking advantage of economies of scale, automating your business processes, streamlining your workflows, and using aftermarket consumables. Variable expenses, on the other hand, can be more difficult to predict, since they can be influenced by so many different factors related to production and the market. As mentioned above, variable expenses do not remain constant when production levels change.

Shipping Expenses

Variable expenses are costs that change over time, such as groceries or movie tickets. Because these costs might fluctuate over a week, month or year, it can be challenging to pinpoint what you’ll spend. Some are vital, like groceries, and others, like movie tickets, are optional. Daphne Foreman is a former Banking and Personal Finance Analyst for Forbes Advisor. She has worked as a personal finance editor, writer, and content strategist covering banking, credit cards, insurance and investing. As a small business owner and former financial advisor, Daphne has first-hand experience with the challenges individuals face in making smart financial choices.

During the summer, does it get so hot that you need to crank the air conditioning? The costs of keeping your home at a comfortable temperature rise as the weather gets more extreme. During mild months, you spend far less money on heating or cooling systems. ​Another tactic for managing an unexpected increase in variable expenses is to be prepared to trim back any discretionary expenses to cover the variable expenses.