Variable cost

Published Friday 24 July 2026

Table of contents

• What is a variable cost?
• Examples of variable costs
• How to calculate variable cost
• Variable costs vs fixed costs
• Semi-variable and stepped costs
• Why variable costs matter
• Track your variable costs with Xero
• FAQs on variable costs
• Related terms
• Learn more about variable costs

Key takeaways

• Variable costs are expenses that rise and fall with your business activity, so they move up when you produce and sell more.
• They're the opposite of fixed costs, which stay the same no matter how busy you are.
• You work out total variable cost by multiplying your output by the variable cost per unit, which helps you set prices and budgets.
• Tracking variable costs closely gives you a clearer view of your margins, your cash flow, and your break-even point.

What is a variable cost?

Variable costs are expenses that rise and fall with your business activity, moving up and down in line with how much you produce and sell. The busier you are, the higher they go, which makes them the opposite of fixed costs.

Many variable costs, such as inventory and freight, track closely with the number of sales you're making. Not all of them sync up so neatly, though. Spending on marketing, trade shows, and sales travel is meant to drive sales, but it won't always match your sales volume in the same period.

Examples of variable costs

Variable costs show up across most parts of a small business, from the products you sell to the people you pay to sell them. Here are some common examples you'll recognise:

• Inventory and raw materials that go into the products and services you offer
• Packaging and shipping of those goods
• Transaction fees for accepting payments by card, digital wallet, and direct debit
• Contractors you hire during busy periods
• Marketing, which goes up and down depending on when you run campaigns
• Sales travel, which increases when reps go on the road
• Commissions and referral bonuses paid on sales

How to calculate variable cost

You can work out your total variable cost with a simple formula, then break it down per unit to guide your pricing. The two calculations you'll use most often are total variable cost and variable cost per unit.

To find your total variable cost, multiply your total quantity of output by the variable cost per unit. To find the variable cost per unit, divide the total variable cost by the number of units you produce.

Say you make 500 candles in a month and each one costs RM8 in wax, wicks, and packaging. Your total variable cost is 500 multiplied by RM8, which comes to RM4,000. If you already knew the RM4,000 total and wanted the per-unit figure, you'd divide RM4,000 by 500 units to get RM8 per candle.

Variable costs vs fixed costs

The clearest way to understand variable costs is to compare them with fixed costs. A cost is either variable or fixed, and it can't be both.

Fixed costs stay the same no matter how active your business is. They cover things like rent, utilities, insurance, permanent salaries, and other overheads that you pay whether you sell 10 units or 10,000. Variable costs, by contrast, only appear when you're producing and selling.

Semi-variable and stepped costs

Not every cost falls cleanly into one camp. Some sit between fixed and variable, and it helps to know how they behave.

A semi-variable cost, sometimes called a mixed cost, has both a fixed and a variable component. A mobile phone plan is a good example: you pay a set monthly fee, then extra charges once you go over your usage limit.

Stepped costs behave differently again. Some variable costs rise in direct proportion with activity, but others jump in steps. A busy company might hire a new worker who can make another 200 products. The wage cost jumps in one go, but it opens the door to 200 more sales. Because these costs shift with output, they're closely tied to your marginal cost, or the cost of making 1 more unit.

Why variable costs matter

Variable costs change from week to week and month to month, which makes them harder to budget than fixed costs. Getting a handle on them helps you set accurate budgets and predict your cash flow needs.

They also shape your pricing. Since variable costs feed directly into your cost of goods sold, knowing them tells you how much room you have on each sale. That in turn helps you find your break-even point, the level of sales where your income finally covers all your costs.

Track your variable costs with Xero

When your variable costs are recorded and up to date, you can see your margins clearly and make confident decisions about pricing and growth. Xero brings your income and expenses together in one place, so you spend less time on manual admin and more time running your business. Try it for yourself and get one month free.

FAQs on variable costs

Here are answers to some frequently asked questions about variable costs.

How do you calculate the variable cost per unit?

Divide your total variable cost by the number of units you produce. So if RM4,000 in variable costs produces 500 units, your variable cost per unit is RM8.

Is marginal cost the same as a variable cost?

They're related but not identical: variable cost is the total cost that changes with output, while marginal cost is the cost of producing just 1 more unit. Marginal cost is usually made up of variable costs.

How can reducing variable costs improve profitability?

Lowering the cost of each sale, such as cheaper materials or lower transaction fees, widens the margin you keep on every unit. That extra margin flows straight through to your profit.

Where do variable costs appear on financial statements?

Variable costs tied to production usually sit within cost of goods sold on your profit and loss statement. Other variable costs, like sales commissions, appear as operating expenses.

Related terms

• Fixed cost
• Expense
• Operating expense

Learn more about variable costs

• Cost of sales
• Margin of safety formula
• Cost saving ideas
• Start-up costs