Variable Cost Definition | Investopedia

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Variable cost - Wikipedia, the free encyclopedia

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** Variable cost **

From Wikipedia, the free encyclopedia
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Decomposing Total Costs as Fixed Costs plus *Variable Costs*.

*Variable costs* are costs that change in proportion to the good or service
that a business produces.^[1] Variable costs are also the sum of marginal
costs over all units produced. They can also be considered normal costs.
Fixed costs and variable costs make up the two components of total cost.
*Direct Costs*, however, are costs that can easily be associated with a
particular cost object.^[2] However, not all variable costs are direct
costs. For example, variable manufacturing overhead costs are variable
costs that are indirect costs, not direct costs. Variable costs are
sometimes called unit-level costs as they vary with the number of units
produced.

Direct labor and overhead are often called *conversion cost*,^[3] while
direct material and direct labor are often referred to as *prime cost*.^[3]

In marketing, it is necessary to know how costs divide between variable and
fixed. This distinction is crucial in forecasting the earnings generated by
various changes in unit sales and thus the financial impact of proposed
marketing campaigns. In a survey of nearly 200 senior marketing managers,
60 percent responded that they found the "variable and fixed costs" metric
very useful.^[4]

*Contents*

· 1 Explanation

· 1.1 Example 1
· 1.2 Example 2

· 2 See also
· 3 Notes
· 4 References

*Explanation[edit]*

-Example 1[edit]-

Assume a business produces clothing. A variable cost of this product would
be the direct material, i.e., cloth, and the direct labor. If it takes one
laborer 6 yards of cloth and 8 hours to make a shirt, then the cost of
labor and cloth increases if two shirts


Source: en.wikipedia.org/wiki/Variable_cost

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