Variable expenses are things you have to pay for that may change from month to month. Groceries, eating out, electricity or other usage-based bills, and household items like toiletries and cleaning supplies are some other examples of variable costs in your budget. Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A company must still pay its rent for the space it occupies to run its business operations irrespective of the volume of products manufactured and sold. If a business increased production or decreased production, rent will stay exactly the same.
- Then, allocate a certain amount of money to each one and spend only what you’ve designated.
- Lowering variable expenses generally is easier from the standpoint that you simply choose to spend less.
- Your variable expenses fluctuate monthly and are easy to adjust as you go, so it’s easier to plan these around your fixed expenses.
- If this isn’t possible, management may consider analyzing the process to spot opportunities for efficiencies and improvement, which can bring down certain variable costs like utilities and labor.
For example, if a company is having cashflow issues, they may immediately decide to alter production to not incur these costs. Variable expenses can be intimidating because you don’t know what the bill will be every month. However, they aren’t an absolute mystery, as there is historical data to help you determine what you can reasonably expect to pay every period. For example, groceries are a non-discretionary expense, but the type of food purchased can be a discretionary expense. I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.
Variable expenses can add complexity to your monthly budgeting.
A variable expense could be an expense that changes month-to-month, like your heating bill. Variable expenses are more difficult to budget for because they can change unexpectedly. This requires you to be mindful of your spending, so you can stay within budget. For example, raw materials may cost $0.50 per pound for the first 1,000 pounds. However, orders of greater than 1,000 pounds of raw material are charged $0.48.
Variable costs are directly tied to a company’s production output, so the costs incurred fluctuate based on sales performance (and volume). When setting prices, one should ensure that at least the variable expenses are included in the price. That way, a business will not lose money when each unit of a product is sold.
What Is a Variable Expense?
It also allows you to quickly calculate a product’s contribution margin and to estimate the company’s break-even point. An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity. In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases. For example, Amy is quite concerned about her bakery as the revenue generated from sales are below the total costs of running the bakery. Amy asks for your opinion on whether she should close down the business or not. Additionally, she’s already committed to paying for one year of rent, electricity, and employee salaries.
Meanwhile, fixed costs must still be paid even if production slows down significantly. The average variable cost, or “variable cost per unit,” equals the total variable costs incurred by a company divided by the total output (i.e. the number of units produced). A variable expense is a cost that alters in conjunction with some type of activity. Other variable expenses are commissions, billable labor, piece rate labor, and credit card fees. Many other expenses, such as rent expense, are fixed within a certain activity range. Variable expenses, also called variable costs, are expenses that can change over time.
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variable expenses definition
Although fixed costs can change over a period of time, the change will not be related to production, and as such, fixed costs are viewed as long-term costs. When running as expected, variable expenses should integrate well with your typical monthly budget. However, there are times when these variable costs get out of hand and can put a strain on your budget.
Tips for saving money on fixed and variable expenses
A broken air conditioner or a car check-up that reveals the need for new tires or brakes — there are loads of one-time, unexpected expenses that can create big challenges for your budget. Avoid those headaches with an emergency fund that provides a safety cushion. If you have the space in your budget to set aside a few dollars in an emergency fund each month, you can prepare for the unexpected ahead of time. A variable expense can look quite different each month, and right now, as inflation makes everything cost more, your variable expenses might be creating some major headaches. Variable expenses can make budgeting more challenging because you can’t predict an exact figure.
Fixed expenses, such as rent or mortgage payments, remain constant from month to month. However, variable expenses can fluctuate and impact your budget significantly. Variable expenses are costs that fluctuate from month to month or even week to week. They can be influenced by a variety of factors, such as the number of employees you have, the amount of inventory you need to maintain, and the seasonality of your business. Since fixed costs are more challenging to bring down (for example, reducing rent may entail the company moving to a cheaper location), most businesses seek to reduce their variable costs.
Variable expenses can be difficult to budget for as they are unpredictable. It’s crucial to understand the impact variable expenses can have on your budget and find ways to manage them effectively. Here are some examples of fixed expenses that can also be referred to as a corporate best online bookkeeping services for small businesses of october 2023 expense when grouped together. Liliana Hall is an editor for CNET Money covering banking, credit cards and mortgages. Previously, she wrote about personal credit for Bankrate and CreditCards.com. She is passionate about providing accessible content to enhance financial literacy.
But these costs can fluctuate from month to month, depending on your usage and the rates your provider charges. And, if you’re wondering what is a variable expense, it’s an expense that may be higher or lower from one month to the next. Because it is a bill you pay every month and remains roughly the same, a cell phone is a fixed expense. Still, you can work on bringing cell phone costs down to make sure this fixed expense fits in your budget. While most variable costs represent discretionary spending (such as restaurants, Starbucks, and golf), some variable costs represent necessities. For instance, say you spent $400 on groceries in January, $500 in February, and $450 in March.
