Legal Definitions - variable cost

A variable cost is an expense that changes in direct proportion to the level of activity or production within a business. This means that as a company produces more goods or provides more services, its total variable costs increase. Conversely, if production or activity decreases, total variable costs will also decrease. These costs are directly tied to the volume of output.

• Example 1: A Custom Furniture Maker

  Imagine a small business that specializes in crafting custom wooden tables. The cost of the raw materials, such as lumber, screws, wood glue, and varnish, would be considered variable costs. If the furniture maker receives an order for five tables, they will purchase enough materials for five tables. If they then receive an order for ten tables, their total expenditure on lumber, screws, glue, and varnish will double. The cost per table for these materials remains constant, but the total cost for all materials varies directly with the number of tables produced.

• Example 2: A Freelance Graphic Designer

  Consider a freelance graphic designer who charges clients per project and occasionally uses premium stock photos or specialized fonts that require a one-time license fee per project. The licensing fees for these specific assets would be a variable cost. If the designer takes on three projects in a month, and two of them require a licensed stock photo, their total stock photo licensing cost will be for those two projects. If the next month they take on five projects, and four of them require licensed assets, their total licensing costs will increase accordingly. The cost only arises when a project demands it, directly varying with the number of projects requiring such assets.