Variable Cost: Definition, Examples & How to Calculate it

If you are running a business or you’re thinking of starting one, there are some words you must understand very well. One of them is variable cost. This word may sound like something from a textbook, but it is actually very easy to understand. Once you get the meaning and how it works, you will see why many business people always talk about it.

This blog post will explain what variable cost means. I will also share real life examples you can relate with, and show you how to calculate it for any business. Whether you are selling pure water, making clothes, running a bakery, or doing a big importation business, this post will help you.

Let’s start from the meaning.

What is Variable Cost?

Costs that fluctuate based on production or sales volume are known as variable costs. In simple terms, it is the cost that changes when your business activities change.

For example, imagine you sell bottled drinks. If you produce 100 bottles this week, you will spend money to buy 100 bottle covers, 100 labels, 100 empty bottles, and so on. Now if you produce 500 bottles next week, all those things you buy will also increase. This indicates that the cost is variable and changes according to the quantity of goods produced or sold.

That is why it is called variable cost. The word “variable” simply means it changes.

Now, compare this to something like rent. If you rent a shop for 100,000 naira per year, it stays the same whether you sell 1 item or 10,000 items. That kind of cost is called fixed cost, and we will talk about it later. But variable cost is different, it depends on how active your business is.

Examples of Variable Cost in Business

To understand variable cost better, let’s look at some real examples. These are things that most business owners deal with daily.

1. Raw materials

This is one of the biggest variable costs in most businesses. For example, if you run a bread bakery, you need to buy flour, sugar, yeast, and other ingredients. The more bread you want to bake, the more of these ingredients you must buy. So if you bake 100 loaves today and 500 loaves tomorrow, your cost of ingredients will also increase. That is variable cost.

2. Packaging materials

If you are selling sachet water, bottled drinks, snacks, or even clothes, you will always spend money on packaging. Nylon bags, cartons, bottles, wrappers, and stickers are all packaging costs. And the more items you produce, the more you will spend on them. That’s why it’s a variable cost.

3. Electricity or fuel used for production

In Nigeria, many people use generators for their businesses. If you run a printing press or a factory, the more work you do, the more fuel you burn. If you use NEPA light, your prepaid meter also reads higher when machines are working. So the electricity or fuel you use during production can be a variable cost too.

4. Direct labor

In some cases, workers are paid based on how many units they produce. For example, if you employ someone to sew clothes and you pay them 500 naira per dress, then this payment is a variable cost. If they sew 20 dresses, they earn 10,000. If they sew 100, they earn 50,000. The cost changes based on output.

5. Transportation or delivery fees

If you run a delivery business or you send your goods to customers, then transport cost can also be a variable cost. If you deliver 2 packages today and 10 tomorrow, your fuel and driver payment will not remain the same. The more you sell, the more you transport.

6. Commission to sales agents

If you pay someone to help you sell, and you give them a percentage for each sale, that is also a variable cost. Because the more they sell, the more they earn, and the more you spend.

These are just a few examples. Every business has its own unique variable costs depending on the kind of product or service they offer.

How is Variable Cost Different from Fixed Cost?

Many people confuse these two. Variable cost and fixed cost are not the same thing. And it’s very important to know the difference.

Let me explain with a simple example.

Let’s say you are running a small shawarma business in Lagos. You rent a small shop for 100,000 naira per year. That is a fixed cost. Even if you sell only 5 shawarmas in one month, you still pay 100,000.

But what about the bread, chicken, cabbage, and foil paper you use to make each shawarma? Those ones change every day depending on how many customers come. If 10 people buy today, you spend more. If nobody comes tomorrow, you spend nothing. That is variable cost.

So fixed cost stays the same. Variable cost goes up or down with your level of activity.

Understanding this helps you plan better. You will be able to determine which of your business expenses are always going to be the same and which can be adjusted.

How to Calculate Variable Cost

Let’s now discuss how to compute variable costs. It is a fairly easy formula. You can grasp it without being a mathematician.

Variable Cost = Cost per unit × Number of units produced

Let me break it down.

Cost per unit means how much it takes to produce one item. This includes raw materials, packaging, and any other cost that increases with each item.

Number of units produced is how many of the item you make or sell.

Let’s look at a simple example:

Imagine you are producing bottled zobo drink. One bottle costs you:

Plastic bottle – 50 naira
Zobo ingredients – 100 naira
Label – 20 naira
Gas and other small things – 30 naira
Total per bottle – 200 naira

Now, if you produce 500 bottles in one week, your total variable cost is:

200 naira × 500 = 100,000 naira

That is your variable cost for that week.

If the next week, you produce only 300 bottles, then:

200 naira × 300 = 60,000 naira

The cost has changed. That’s why it is called variable.

How to Track Your Variable Costs

Many small business owners in Nigeria do not track their costs well. This is dangerous. If you don’t know your real costs, you can’t know if you are making profit or not.

To track your variable costs, here are some easy tips:

Use a notebook or spreadsheet to write down how much you spend on materials each week

Group your expenses into two: fixed and variable. That way, you can see what changes and what doesn’t

Review your spending every week or month and compare it to your production

Check if your selling price covers both the cost of production and a little profit

Always update your cost per unit when the price of materials goes up in the market

Don’t mix your personal expenses with business expenses

By doing this, you will always know how your money is moving. It helps you make better decisions.

Why Is Knowing Your Variable Cost Important?

Knowing your variable cost is not just something for accountants or big companies. It is important for anyone who wants to run a smart and profitable business.

Here are some reasons why it matters:

It helps you set the right price

If you know how much it costs you to make one item, then you can set a price that gives you profit. For example, if one bottle of drink costs you 200 naira, and you want to make at least 100 naira profit per sale, then your selling price should be at least 300 naira.

It helps you control your spending

Sometimes, prices of materials can go up without you knowing. If you’re not tracking your variable costs, you may be spending too much and losing money. But if you check regularly, you can make changes quickly.

It helps in planning and budgeting

If you want to plan for next month or next year, knowing your variable cost will help you estimate how much you need to produce more items.

It helps you calculate break-even point

Break-even point means the number of items you must sell to cover all your costs. If you know your fixed cost and your variable cost, you can calculate this easily.

It helps when applying for loans or talking to investors

If you ever want to collect money from a bank or an investor, they will ask you questions about your cost structure. Knowing your variable cost will help you answer confidently.

Variable Cost in Service-Based Businesses

So far, we’ve been talking about people who sell products. But what about those who sell services like hairdressing, photography, delivery, or laundry?

Yes, service businesses also have variable costs.

For example, if you run a small laundry shop:

Soap, water, and electricity are your variable costs. The more clothes you wash, the more soap and water you use.

If you pay someone to help you based on how many clothes they wash, that’s also variable.

In photography:

Printing paper, ink, and editing time can all increase with more clients.

So don’t think variable cost only applies to goods. It also applies to services. You just need to look closely at what changes when your work increases.

Conclusion

Variable cost is one of the most important parts of running a business. It helps you know how much it truly costs to make or sell one product. If you don’t know your variable costs, you may set the wrong price and lose money without knowing. The good news is, variable cost is not hard to understand. It simply means the costs that change based on how much you produce or sell.

Once you know the cost per unit and the number of units produced, you can calculate it easily. So whether you run a small food business, an online shop, a tailoring service, or even a farm, always check your variable costs. It will help you grow, plan, and make better decisions.