Variable cost:
The cost that varies in total, directly and proportionately with changes in the cost drivers (activity level or volume), is called variable costs. Let, the activity level increases 20%, total of a particular cost will also increase 20% or vice versa, it’s a variable cost. A variable cost may also be defined as a cost that remains the same per unit at different activity levels.
Characteristics:
Variable costs have the following features/characteristics:
- Variable cost changes in total amount in direct proportion to volume,
- It constant in per unit as volume increases or decrease,
- Assignable with easy and accuracy and
- controllable by a specific department head.
The costs which have these characteristics generally include direct materials and direct labor. Some manufacturing/factory overhead (indirect materials, indirect labor, supplies, fuel, power, small tools etc.) and nonmanufacturing costs (sales commission, shipping costs etc.) are also variabl
Example:
Say, A Co.’s cost of direct materials used was Tk.10,000 for producing 500 units finished goods in January, 2021. In February, the cost of direct materials used was Tk. 12,000 for producing 600 units finished goods. Per unit materials cost is same (Tk 20) in both months (January: Tk. 10,000+ 500 units Tk.20; February: Tk. 12,000+600 units = Tk.20). Here, total material costs changes with volume changes but per unit cost is fixed cost. So, here direct material cost is the variable cost.
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