Variable costs are business expenses that change when production volumes change. They differ from fixed costs, which remain constant if production volume rises or falls.
The most common forms of variable cost include materials used to make products and money to be paid to workers. These expenses will rise if production increases, as the business will need more raw materials and more workers. If production drops, these costs can drop also.
The ratio of variable costs to fixed costs is an important factor for businesses and their investors. It indicates how much profit can be made from an increase in sales, and how much a drop in sales could hurt a business’s bottom line.