What is Variable Expense?

A variable expense is a cost that alters in conjunction with some type of activity. For example, a business only pays a sales commission to a salesperson if that person completes a sale transaction; therefore, the commission is a variable expense. A business that has a high proportion of variable expenses can usually generate a profit on a low sales level. The reason is that there are few fixed expenses to be paid for in each month, making it easier to achieve a breakeven sales level.

When setting prices, you should ensure that at least the variable expenses are included in the price. That way, a business will not lose money when each unit of a product is sold.

Examples of Variable Expenses

The following can all be classified as variable expenses:

Direct materials
Direct labor
Manufacturing supplies
Sales commissions
Electricity for production equipment
Water use in manufacturing processes
Freight costs
Fuel surcharges
Packaging for shipping
Credit card processing fees
Maintenance costs for equipment that vary with usage
Royalties that are based on sales or usage

In all cases, these expenses are only incurred when some sort of activity is conducted, such as a product sale or a manufacturing process.

Variable Expenses vs. Fixed Expenses

Fixed expenses are fixed within a certain activity range. For example, the rent expense for a 30,000 square foot factory remains the same until a new product line is added, after which a new lease must be obtained for the additional amount of square footage needed for the additional equipment.