Types of Variable Costs
1. Direct Materials: These are the raw materials or components directly used in the production of goods. The cost of these materials fluctuates with the level of production, making them a prime example of variable costs that increase as production levels rise.
2. Direct Labor: This includes the wages or salaries paid to workers directly involved in the production process. As production increases, more labor may be required, leading to higher labor costs. Direct labor costs are directly tied to the number of units produced, making them a key variable expense.
3. Variable Overhead: These are indirect costs that vary with production levels, such as utilities (electricity, water, gas), maintenance and repairs, and production supplies. Variable overhead costs fluctuate in line with changes in production activity, reflecting the usage of resources.
4. Sales Commissions: If a business pays commissions to sales staff based on the number of units sold or sales revenue generated, these costs are considered variable and increase with sales volume. Sales commissions are directly linked to the level of sales achieved, making them a variable expense that incentivizes sales performance.
5. Shipping and Freight: Costs associated with shipping finished products to customers, such as transportation fees and packaging materials, can vary based on the volume of goods shipped. Shipping and freight costs fluctuate with sales levels and shipment volumes, reflecting the variable nature of distribution expenses.
6. Direct Expenses: Other direct expenses related to production, such as subcontractor fees or outsourced services, may vary with production levels. Direct expenses incurred for specific production activities vary in line with production volume, impacting overall variable costs.