What Are Variable Expenses & How to Save on Them

For instance, inflation in the economy may drive up your grocery costs—but so can the decision one week to stock up on food. For example, sales commissions expense and cost of goods sold will be greater when sales are greater; electricity expense will decrease when machine hours are reduced. ​Let’s consider a hypothetical example in the restaurant industry to demonstrate a guide to basic accounting principles how to calculate and analyze the variable expense ratio. The Variable Expense Ratio enables analysis of the profitability and cost efficiency of the business. This allows the business to set the pricing of products and provide goals & profitability projections. If you already have high-interest debt, you can check out our blog post on how to pay off credit card debt.

They are fixed up to a certain production level, after which they become variable. It’s easy to separate the two, as fixed costs occur on a regular basis while variable ones change as a result of production output and the overall volume of activity that takes place. Unlike variable expenses, fixed ones tend to be predictable and therefore easier to plan for. Examples of fixed expenses include mortgage payments, car insurance and cell phone bills.

Fixed vs. variable expenses: What’s the difference?

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. While employee salaries are a fixed cost for most businesses, there are some situations where they can be considered a variable expense. For example, if your employees are paid hourly, their wages will vary based on the number of hours they work.

Variable costs are usually viewed as short-term costs as they can be adjusted quickly. For example, if a company is having cashflow issues, they may immediately decide to alter production to not incur these costs. I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world. Kim Porter is a freelance writer who has written about personal finance topics for AARP Magazine, Bankrate, Credit Karma, U.S. News & World Report, Reviewed and more.

  • On the other hand, variable costs are safer, generate less leverage, and leave the company with smaller upside potential.
  • If Amy were to continue operating despite losing money, she would only lose $1,000 per month ($3,000 in revenue – $4,000 in total costs).
  • Variable costs may need to be allocated across goods if they are incurred in batches (i.e. 100 pounds of raw materials are purchased to manufacture 10,000 finished goods).

Trimming your grocery bill is certainly possible and one way to reduce expenses, but discretionary spending should be your first target for cuts. Variable expenses can quickly lead to more debt if you don’t budget for them. A surprise bill or a holiday season that’s more expensive than expected could easily break your budget and cause you to reach for a credit card. You can also look back at your bank or credit card statements and add up everything you’ve spent on that expense category, then calculate the average. If you’re not actively budgeting, you may wish to start tracking your expenses for a few months. You can use a tool like Mint or YNAB to track your spending automatically, or take a simple pen-and-paper approach.

variable expenses definition

The table below shows how the variable costs change as the number of cakes baked vary. In general, companies with a high proportion of variable costs relative to fixed costs are considered to be less volatile, as their profits are more dependent on the success of their sales. In conclusion, variable expenses play a significant role in determining the effectiveness of a budget. Firstly, it allows you to identify areas where you may be overspending and find ways to reduce your expenses.

What are Variable Expenses?

But it’s more important to make sure you’re budgeting for essential expenses, which might include both fixed and variable expenses. If you need to start cutting back on costs, look at both your fixed and variable expenses. Devoting a Saturday afternoon to reviewing all of your subscriptions, insurance plans and recurring monthly bills may help you trim hundreds of dollars from your fixed monthly budget. The concept of relevant range primarily relates to fixed costs, though variable costs may experience a relevant range of their own.

The first is to review your financial statements from previous months or years and look for any costs that fluctuate. You can also track your expenses on a month-to-month basis and look for patterns over time. Finally, if you have a budget for your business, you can identify which expenses are variable and which are fixed. Although you have to pay the interest each month, the amount varies depending on your interest rate, the loan amount, and how payments you have left. It may be easier to budget for fixed expenses first because you know how much these cost.

If the company does not produce any mugs for the month, it still needs to pay $10,000 to rent the machine. But even if it produces one million mugs, its fixed cost remains the same. The term cost refers to any expense that a business incurs during the manufacturing or production process for its goods and services. Put simply, it is the value of money companies spend on purchasing and selling items. Businesses incur two main types of costs when they produce their goods—variable and fixed costs.

What is an example of variable expense?

Other examples include clothing, vacation costs, holiday gifts and eating out. Variable cost and average variable cost may not always be equal due to price increase or pricing discounts. Consider the variable cost of a project that has been worked on for years. An employee’s hourly wages are a variable cost; however, that employee was promoted last year. The current variable cost will be higher than before; the average variable cost will remain something in between. In this article, we’ll focus on one such expense – variable expenses – and explore what they are and how they can affect your budget.

We’ll delve into the different types of variable expenses, how to track them, and some tips on how to manage them effectively. There are plenty of nonessential costs that you can consider cutting altogether. Take a look at your spending summary from last month, and tally up everything you didn’t need.

What Is the Formula for Total Variable Cost?

Some expenses fluctuate from month to month, while others remain the same. Your payment for rent typically remains the same monthly, but how much you spend on groceries or your monthly utility bill changes constantly. Monthly expenditures that generally remain the same are known as fixed expenses, while variable expenses are those that change constantly. Monthly variable expenses can also be reduced by taking advantage of economies of scale, meaning you’ll produce or purchase more units of goods or services at a lower per-unit cost. So, if you ramp up production, the contribution margin will increase because you’ll be paying less per unit.

Commissions are often a percentage of a sales proceeds that is awarded to a company as additional compensation. Because commissions rise and fall in line with whatever underlying qualification the salesperson must hit, the expense varies (i.e. is variable) with different activity levels. It’s important to note that some expenses can fall into both categories. For example, groceries are a non-discretionary expense, but the type of food purchased can be a discretionary expense. Expenses like groceries, utility bills and gas are required, but the amount you spend on them changes every month. For instance, your heating bill is a variable expense (it’s likely higher in the winter than the summer), but it wouldn’t be considered discretionary.

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