What is a Variable Cost?

When budgeting for companies, some expenses are fixed overhead and some are variable, which depend on the amount of work being done.

The direct cost of materials and labor are a good example of variable costs that will fluctuate with production levels. There may be an equation that the company can use to reliably predict these variable costs, but they are not fixed costs.

From an accounting perspective, of course, these costs would be in separate sections. Fixed costs include warehousing, depreciation, insurances, rent, taxes, salaries, and so forth. These can be put into the budget before anything else happens or any orders have been taken for the year. The variable costs must be taken into account on the fly.

Ideally they would be paid from revenue generated by the project at hand, but businesses often need working capital or lines of credit to get them through their operations cycle until cash settlement is paid for the work.