Variable cost

Published Friday 24 July 2026

Table of contents

• What is a variable cost?
• Examples of variable costs
• How to calculate variable costs
• Why variable costs matter
• How variable costs differ from fixed costs
• What are stepped costs?
• Manage 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 in line with how busy your business is, so they move with your sales and output.
• To work out your total variable cost, multiply the quantity of output by the variable cost per unit.
• Variable costs are the opposite of fixed costs, which stay the same no matter how active your business is.
• Tracking variable costs helps you set accurate budgets, price your products, and plan your cash flow.

What is a variable cost?

A variable cost is an expense that goes up and down in line with business activity. The busier you are, the higher it goes, which makes it the opposite of a fixed cost.

Many variable costs, such as inventory and freight, rise in line with the number of sales you make. But not all variable costs sync up this way. Spending on marketing, trade shows, and sales travel might be intended to drive up sales, yet it won't always match your output perfectly.

Examples of variable costs

Variable costs show up across almost every part of a business. Here are some common examples you're likely to see:

• Inventory and raw materials that go into the products and services you offer
• Packaging and shipping of those goods
• Transaction fees for accepting payments via card, digital wallet, and direct debit
• Contractors that you hire during busy times
• 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 costs

You can work out your variable costs with 2 simple formulas. The first gives your total variable cost, and the second gives the variable cost per unit. Both use the same figures, just arranged differently:

• Total variable cost = quantity of output multiplied by variable cost per unit
• Variable cost per unit = variable cost divided by units produced

Say a small furniture maker builds 200 chairs in a month, and each chair uses R150 of timber, fabric, and fittings. The total variable cost is 200 × R150 = R30,000. To check the cost of a single chair, divide the total variable cost by the units produced: R30,000 ÷ 200 = R150 per chair.

Why variable costs matter

Variable costs change from week to week and month to month, depending on what your business is doing. They're harder to budget than fixed costs, so they need closer attention.

Understanding your variable costs helps you set accurate budgets, price your products, and predict your cash flow needs. Because many of them sit within your cost of goods sold, they also shape the gross profit you report on your income statement.

How variable costs differ from fixed costs

The simplest way to tell these costs apart is to ask whether the expense moves with your activity. A cost is either variable or fixed, and it can't be both.

Fixed costs are expenses that stay the same no matter how active your business is. They're tied to things like rent, utilities, insurance, and permanent wages and salaries.

What are stepped costs?

Some variable costs rise in direct proportion with business activity, such as inventory costs that climb in step with sales. In other cases the relationship isn't so linear.

A busy company might hire a new employee who can make another 200 products. The wage cost jumps significantly, but it opens the door to another 200 sales. These sorts of variable costs are known as stepped costs.

Manage your variable costs with Xero

When you can see your variable costs clearly, budgeting and pricing get a lot easier. Xero brings your finances together in one place, so you can track spending, watch your cash flow, and make confident decisions as your business grows. Ready to take control of your costs? Start today and get one month free.

FAQs on variable costs

Here are answers to some frequently asked questions about variable costs to help you put the ideas above into practice.

How do you calculate variable cost?

Multiply the quantity of output by the variable cost per unit to get your total variable cost. To find the variable cost per unit, divide your total variable cost by the number of units produced.

What is the difference between fixed and variable costs?

Variable costs rise and fall with your business activity, while fixed costs stay the same regardless of output. Rent and insurance are fixed, whereas raw materials and shipping are variable.

Is labour a variable or fixed cost?

It depends on the arrangement: permanent salaries are usually a fixed cost, while pay for contractors or casual staff hired during busy times is a variable cost. Commission paid on sales is also variable.

What are examples of variable costs?

Common examples include raw materials, packaging, shipping, payment transaction fees, and sales commissions. Marketing and sales travel can be variable too, since they change with your campaigns and activity.

Where do variable costs appear on the income statement?

Many variable costs sit within your cost of goods sold, which is subtracted from revenue to give your gross profit. Others, such as sales commissions, may appear among your operating expenses.

Related terms

• Fixed cost
• Expense
• Operating expense
• Break-even point
• Opex vs capex

Learn more about variable costs

• Cash flow management guide
• Cash flow forecasting
• Cost of goods sold (COGS)
• Gross profit margin