What is a variable cost

In this post and the next few, I’ll explain some basic terms used to understand costs in management accounting.

A variable cost is a cost which change in accordance with the activity of a business. For example, if I order a meal at a restaurant, the food itself is a cost that would not be incurred had I not walked in. As the restaurant fills up, then the food ingredient costs go up. Another variable cost example might be fuel in a car or truck. The more the car or truck is used, the higher the cost.

In a business, variable costs can usually be saved by simply not making any product or delivering a service, but this of course may not always be possible. Typical variable costs are labour and materials associated with a product or service. Such costs would not be incurred if the product or service was not delivered i.e something triggers the incurring of variable costs.Think of the chef in the kitchen of a restaurant – a customer order means food costs increase, or a variable cost has been incurred. You may be thinking of the chef’s wages – I’ll come back to that in the next post.