Variable Costs

Overview

Variable Costs are costs that increase with each additional unit of product produced. The most straightforward example is the raw material costs that go into producing a physical product. As production is increased, raw material costs will increase proportionately.

Many costs that are usually classified as variable are actually costs that are fixed over a set of ranges (see above). For example, labor is relatively fixed. If a firm increaese production by a single unit of the product, this likely will not require a whole new employee. And a firm cannot hire half an employee. When production is raised by a single unit, the current employees are usually expected to work just a little harder.

This works only up to a point, at which point management hires new talent. This makes labor costs look more like a staircase than a smooth upward sloping curve.