Variable Costs Concept
Variable costs are the costs of an entity that vary directly with its activity volume. For example, costs with raw materials vary directly with the number of produced units, being, for this, one of the variable costs easier to understand and identify. However, there are a lot of other costs that vary directly with the activity volume being examples the commissions and other sales costs, transports of merchandise costs, costs with consumed energy in the productive process, etc.
Being proportional to the activity volume, variable costs increase when the activity increases and decrease when the activity drops, keeping relatively stable average costs of production. For this reason, companies usually seek to transform some of their fixed costs into variable costs, thereby loosening the costs in times with lower activity. Such can be achieved, for example, through the external resource (outsourcing) for the performance of certain activities.
