It is called cost the financial outlay that must be made to acquire or maintain a product or service. Variable, for its part, is that which varies: that changes or has no stability.
The idea of variable cost, therefore, refers to the cost that experiences variations when production volume is modified. As the level of activity increases, so do variable costs. Similarly, if the production, variable costs fall.
Let’s look at some concepts that are related to variable cost, and that are necessary to understand it in all its depth. We can start from the following statement: the variable cost undergoes changes as the output. It is understood by output or level of exercise the degree to which the production capacity.
For its part, capacity of production (or productive capacity) is the maximum level that a given structure can reach in its activity. This concept is essential to manage any company, since it leads to the analysis of the degree of use that each resource receives and, therefore, to its optimization.
Returning to production volume, it is usually measured as a percentage, that is, of the use of production capacity. On the other hand, it is also possible to appeal to absolute magnitudes, such as hours of service, units manufactured, number of services provided, etc.
All this shows us that according to the percentage of use that we give to the resources of a company, the variable cost will be modified. Except for the cases in which a change of structureIn economic units, the trend of variable costs is usually linear; for this reason, they have an average value per unit that is generally constant.
When the cost is not linked to the level of activity, it is called fixed cost. In this case, whether the level of activity is increased or decreased does not affect the cost, since it does not depend on that. While it may seem easy to understand the differences between variable and fixed costs, it is not a mere distinction between two concepts, but an essential aspect to consider when making the most important decisions of a business.
Take the case of a pizzeria. To produce a Pizza large mozzarella, you need to spend 10 pesos in raw materials (between flour, tomato sauce, mozzarella cheese and other ingredients). If the pizzeria decides to produce one hundred mozzarella pizzas per night, it will cost 1000 pesos in raw material. But if the increase in demand leads to the need to produce one hundred and fifty pizzas, the cost of raw materials will rise to 1500 pesos. It can be said, in this way, that raw materials constitute a variable cost for the pizzeria.
That same pizzeria pays 17,000 pesos per month for him rental of the space where it works. It does not matter if every night it produces fifty, one hundred, two hundred or a thousand pizzas: the rental price will remain the same. Rent, then, is not a variable cost: it is a fixed cost.
According to the theory of microeconomics, variable costs usually fall into the group of non-linear, and a first stage of increasing returns is observed, followed by a decreasing one. Microeconomics belongs to economics, and focuses on the study of the way in which individual agents behave, such as the companies, employees, investors and consumers, as well as the markets themselves.