Definition:
Variable costs are those that rise and fall with the production volume. Typically found in cost of goods sold, it does not always include everything in COGS. Some items that are considered a variable cost are the materials you have to buy to produce the product, sales commissions, or labor costs for the production employees who are paid by piece rate.
Example:
These are examples of items listed as a variable cost on the income statement. Most companies only list one or two items as cost of goods sold or cost of services.
Book Excerpt:
(Excerpts from Financial Intelligence, Chapter 8 – Costs and Expenses)
You might think that COGS is the same as “variable costs” – costs that vary with the volume of production – and that operating expenses are fixed costs. Materials, for example, are a variable cost: the more you produce, the more material you have to buy. And materials are included in COGS. The salaries of the people in the HR department are fixed costs, and they’re included in operating expenses. Unfortunately, things aren’t so simple here. For example, if the supervisors’ salaries are included in COGS, then that line item is fixed in the short run, whether you turn out one hundred thousand widgets or one hundred fifty thousand.
