Explanation
For example, a firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention. These costs are variable costs.
A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
For some employees, salary is paid on monthly rates, independent of how many hours the employees work. This is a fixed cost. On the other hand, the hours of hourly employees can often be varied, so this type of labour cost is a variable cost.
Read more about this topic: Variable Cost
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“My companion assumes to know my mood and habit of thought, and we go on from explanation to explanation, until all is said that words can, and we leave matters just as they were at first, because of that vicious assumption.”
—Ralph Waldo Emerson (1803–1882)
“The explanation of the propensity of the English people to portrait painting is to be found in their relish for a Fact. Let a man do the grandest things, fight the greatest battles, or be distinguished by the most brilliant personal heroism, yet the English people would prefer his portrait to a painting of the great deed. The likeness they can judge of; his existence is a Fact. But the truth of the picture of his deeds they cannot judge of, for they have no imagination.”
—Benjamin Haydon (1786–1846)
“What causes adolescents to rebel is not the assertion of authority but the arbitrary use of power, with little explanation of the rules and no involvement in decision-making. . . . Involving the adolescent in decisions doesn’t mean that you are giving up your authority. It means acknowledging that the teenager is growing up and has the right to participate in decisions that affect his or her life.”
—Laurence Steinberg (20th century)