Cost is the financial outlay that must be made to acquire or maintain a product or service. Variable , on the other hand, is that which varies: that changes or that does not have stability.
The idea of variable cost , therefore, refers to the cost that undergoes variations when the production volume changes . As the level of activity increases, variable costs also increase. Likewise, if production is reduced, variable costs fall.
Let's look at some concepts that are related to variable cost, and that are necessary to understand it in all its depth. We can start from the following statement: the variable cost changes as the production volume varies. Production volume or activity level is understood as the degree to which production capacity is used.
For its part, production capacity (or productive capacity ) is the maximum level that a given structure can reach in its activity. This concept is fundamental to manage any company, since it gives rise to the analysis of the degree of use that each resource receives and, therefore, its optimization.
Returning to the production volume, it is generally measured as a percentage, that is, the amount of production capacity used. On the other hand, it is also possible to appeal to absolute magnitudes, such as hours of service consumed, units manufactured, number of services provided, etc.
All this shows us that depending on the percentage of use we give to a company's resources, the variable cost will be modified. Except for cases in which a change in structure takes place, in economic units, the trend of variable costs is usually linear; For this reason, they have an average value per unit that is generally constant.
When the cost is not tied to the level of activity, it is called a fixed cost . In this case, whether the level of activity is increased or reduced does not affect the cost, since it does not depend on that. Although it may seem easy to understand the differences between variable and fixed costs, it is not a mere distinction between two concepts, but rather an essential aspect to take into account when making the most important decisions of a business.
Take the case of a pizzeria. To produce a large mozzarella pizza , you need to spend 10 pesos on raw materials (including flour, tomato sauce, mozzarella cheese and other ingredients). If the pizzeria decides to produce one hundred mozzarella pizzas per night, it will cost 1000 pesos in raw materials . But if the increase in demand leads to the need to produce one hundred and fifty pizzas, the cost of raw materials will rise to 1,500 pesos . It can be stated, in this way, that raw materials constitute a variable cost for the pizzeria.
That same pizzeria pays 17,000 pesos per month to rent the space where it operates. It doesn't matter if you produce fifty, one hundred, two hundred or one thousand pizzas each night: the rental price will remain the same. Rent, then, is not a variable cost: it is a fixed cost.
According to the theory of microeconomics, variable costs usually fall into the group of non-linear costs, and a first stage of increasing returns is observed, which is followed by a stage of decreasing returns. Microeconomics belongs to economics, and focuses on the study of the way in which individual agents behave, such as companies , employees, investors and consumers, in addition to the markets themselves.