What is a variable cost?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A variable cost is a cost that rises and falls with the level of business activity, such as the number of goods made, jobs completed or sales made. Materials, stock bought for resale, packaging, sales commission and card payment fees are common examples. If activity doubles, a purely variable cost roughly doubles too.
Variable costs are usually thought of per unit: the materials in one item, the packaging for one order, the commission on one sale. Multiplying the cost per unit by expected sales gives the total for a budget or forecast. Taking it away from the selling price shows how much each sale leaves towards fixed costs and profit.
Calling a cost variable says nothing about which side of the line between direct costs and overheads it falls on, because that depends on what the cost relates to. Many variable costs are direct, such as materials used on a job, but some overheads vary too, such as power for a workshop that runs extra shifts in busy months.
Wages can sit on either side. Casual staff rostered to match demand behave like a variable cost, while a permanent employee on a set salary behaves like a fixed one. Because variable costs fall when sales fall, they ease the pressure of a quiet month, but a rise in a supplier's prices changes the cost of every unit sold.
In Australia
business.gov.au's glossary describes a variable cost as one that moves with how many goods are produced or how much demand there is for the product or service. Its budgeting guide asks for estimates of variable costs, giving wages, utilities and supplies as examples.
Its guidance on improving cash flow suggests matching staff rosters to peak periods, waiting until the customer has paid before paying a sales commission, and negotiating better terms with suppliers.
Worked example
| Candles sold | Materials and packaging (AUD) | Card payment fees (AUD) | Total variable costs (AUD) |
|---|---|---|---|
| 200 | 1,130.00 | 150.00 | 1,280.00 |
| 400 | 2,260.00 | 300.00 | 2,560.00 |
| 600 | 3,390.00 | 450.00 | 3,840.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Assuming a cost is variable because it is a direct cost, or fixed because it is an overhead.
- Putting one flat monthly figure for materials in a budget, so it is wrong as soon as sales differ from the estimate.
- Quoting or pricing from an old cost per unit after a supplier has raised its prices.
- Forgetting small per-sale costs, such as card fees, packaging or delivery, when working out what each sale costs.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Create a budget
business.gov.au, Australian Government. Current at 16 October 2026, released 14 November 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Improve your cash flow
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.