When we talk about costs in connection with production, we often divide the costs into fixed or variable costs. If a cost is variable, it means that the cost will vary depending on how much the company sells or produces.
Variable costs are costs you have in connection with production and sales, which will increase if sales and production increase. In production, the variable costs can be, for example, materials, raw materials, electricity, packaging, and similar. If it is about sales, costs can be, for example, shipping.
Fixed costs are costs that are not affected by the size of production, such as rent for premises and employee wages.
Different variable costs
Variable costs come in different types, and we can divide them into three categories.
- Proportional variable costs: Increase directly as the production volume goes up.
- Overproportional variable costs: Rise even faster than production levels.
- Underproportional variable costs: Variable costs that increase at a lower rate than the production quantity.
Let’s say you have to buy more raw materials because production is increasing. Some raw materials are used up in line with production, some you have to buy more of than you need, and others you will buy more of, but the cost will decrease as you buy larger quantities. These can be examples of how variable costs will vary.