How do I calculate variable expenses?

Variable expenses fluctuate with your business activity and tend to increase as your production or sales volume rises, and decrease as your activity level falls. 

To calculate variable costs, use one of the following methods.

Method 1: Multiplying variable cost per unit by production or sales volume

First, identify variable cost per unit:

• Determine the cost directly associated with producing or selling one unit of your product or service (cost of raw materials used per unit, average labor cost per unit, variable overhead costs such as utilities)

Second, gather data on the number of units produced or sold during a specific period.

After that, multiply the variable cost per unit by the production or sales volume to find the total variable expense for that period:

Variable expense = Variable Cost per unit × Production/Sales volume

 

EXAMPLE
A bakery produces cookies. Each cookie requires $0.20 worth of dough and $0.10 in labor per unit. During a month, they produce 10,000 cookies. Variable expense = $0.30/cookie × 10,000 cookies = $3,000.

Method 2: Subtracting fixed costs from total costs

This method relies on knowing all business expenses and fixed costs:

Variable expense = Total cost – Fixed cost

Frequently asked questions

What if my variable costs don’t perfectly correlate with production sales volume?

In some cases, variable costs might not correlate perfectly with production or sales volume.  Some costs may decrease per unit with higher volume, or there might be other factors influencing the cost structure. 

How can understanding variable expenses benefit my business?

It is beneficial to understand variable expenses, so that you can:

• Set competitive prices: knowing your variable costs per unit helps determine the minimum price needed to cover costs and achieve profitability
• Optimize production: analyze how variable costs impact profit margins at different production levels to identify areas for cost reduction
• Make informed business decisions: make data-driven decisions about pricing strategies, resource allocation, and expansion plans