Definition of Variable Costs

Variable costs are costs that are not fixed and vary concerning some underlying activity. In any business, some expenses are fixed and some vary concerning sales or production. Building rent is fixed for a whole month but the electricity bill is variable as more units the business consumes the more will be the amount of expense.

Assume that a bakery has a building rent of $500 a month, the gas charges are $2 per unit of production. In June, July and August the bakery produced 300, 200 and 400 loaves of bread respectively. The variable cost will be changing with several loaves of bread produced. As the gas is a variable expense the variable costs and total costs will be as follows: