Variable Cost Definition
variable star costs are the costs incurred to create or deliver each whole of output. so, by definition, they change according to the number of goods or services a business produces. If the company produces more, the price increases proportionately. For model, Uber pays a driver for every ride they complete. This is a variable cost, and is Uber ’ s primary expense. It ’ sulfur perplex how Uber has been able to convince Wall Street that it is chiefly a fix cost technical school platform. It is in fact, a primarily variable-cost-based business, which has huge ramifications for how it can and should operate. But we digress .
overall, varying costs are immediately incurred from each unit of production, while fixed costs rise in a step officiate and are not based on each individual unit .
Variable Cost Formula
To calculate the total variable costs for a business you have to take into report all the labor and materials needed to produce one whole of a product or service. The entire variable star cost formula can then be described as the total quantity of output times the variable monetary value per unit of output signal. Be careful that you don ’ thyroxine mix up variable cost with variable cost, which is an report method acting used to report variable star cost .
Average Variable Cost
The average variable monetary value can be considered as the entire variable cost per unit of measurement of output. If you divide the sum varying monetary value by the total output produced, then you receive the average variable cost ( AVC ). Profit-maximizing fabricate companies use the AVC to help them decide at which clock they should end the production for a particular good. If the price they receive for the merchandise is higher than the AVC, it is one indicator of a profitable product .
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Variable Cost Examples
varying price examples include direct labor, energy and raw materials costs. Taken together, these are normally referred to as the Cost of Goods Sold, or COGS. variable costs are typically much easier to modify than fixate costs, which makes it very crucial for commercial enterprise leaders to pay attention to them on a regular basis .
Take a car manufacturer. Each part of a car is a variable star price, including the tires. For example, every car that is produced must have a set of four tires. If the tires cost $ 50 each, the bore costs for each manufactured car are $ 200. Because the manufacturer only pays this cost for each unit produced, this is a varying cost. If 100 cars are produced, the tire costs would be $ 20,000. If 10 cars are assembled, the cost would be $ 2,000 .
Variable Costs Specific To The Consulting Industry
Why is variable cost important to understand for prospective consultants ? As a adviser, you ’ ll be spending most of your fourth dimension dealing with a company ’ second P & L ( or the income statement ). Why ? Because your job is to identify tax income or savings that will drop to the bottom line. And as we ’ ve already established, cutting variable costs ( i.e. outsource, replacing parts, optimizing processes ) is much easier than cutting fixed costs. You ’ ll be dealing a fortune with these costs throughout your time as a adviser. So get conversant immediately with how these costs impact a business, and how a variable-cost-based occupation model differs from a fixed-cost-based business model .
Why Does Variable Cost Matter?
While it normally makes small feel to compare variable costs across industries, they can be very meaningful when comparing companies operating in the same industry. They denote the amount of money spent on the production of a merchandise or service and are among the most important analyses a business ( or adviser ) can run. Without understanding these costs, you can ’ metric ton understand which product/service is most profitable. once you understand this, you can know where you should be focusing most of your attention .
Variable Cost Businesses vs Fixed Cost Businesses
In perfume, there are two kinds of clientele models companies fall into : primarily fixed cost or primarily varying cost based. Understanding which model your occupation or customer falls in will give you a big peg up when looking to solve strategic or operational issues. This is besides key understanding for case interviews !
high fixed cost businesses primarily focus on driving volume growth ( think Netflix ). Whether one person or 1M people watch The Office, the license cost to Netflix is the same. so, Netflix benefits by driving subscriber growth ( even at lower prices ) to more promptly reach a breakeven luff for its high fixed costs .
High variable star cost businesses primarily focus on increasing their price office ( think Coach ). For each bag, wallet, etc. that Coach produces, it incurs a variable star price. To maximize each unit of measurement of production, Coach has branded its products as a luxury detail and charges a premium for each whole of product. high prices, versus eminent volume at a lower price, is how Coach maximizes profitableness.
now, there are unicorn businesses that can charge a bounty monetary value and drive book ( think Apple ). But, for the most share, businesses fall into one of these two camps .
Conclusion
Every company incurs two types of costs : variable and fix costs. Unlike cook costs, which do not change per each unit of production, variable star costs are related directly related to each intersection a company produces or servicing it delivers. Understanding the difference between variable and specify costs will allow you to price your product appropriately or provide better business advice .
