It is called cost to the financial outlay that must be made to acquire or maintain a product or service. Variable , on the other hand, is that which varies: that changes or that has no stability.
The idea of variable cost , therefore, refers to the cost that experience variations when production volume is modified . As the activity level increases, the variable costs also increase. 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 goes through changes as the output . It is understood by output or level of activity the degree to which the production capacity .
For its part, the 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 results in the analysis of the degree of use that each resource receives and, therefore, its optimization.
Returning to the volume of production, it is usually measured as a percentage, that is, of the one that uses the production capacity. On the other hand, it is also possible to appeal to absolute magnitudes, such as unsuccessful hours of service , manufactured units, number of services provided, etc.
All this shows us that according to the percentage of use we give to the resources of a company, the variable cost will be modified. With the exception of cases in which a change of structure , in economic units, the trend of variable costs is usually linear; For this reason, they have an average value per unit, which is usually constant.
When the cost is not linked to the activity level, it is called fixed cost . In this case, the fact that the level of activity increases or decreases 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 take into account to make 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 requirement to produce one hundred and fifty pizzas, the cost of raw materials will rise to 1500 pesos . It can be affirmed, 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 doesn't matter if every night 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 nonlinear, and a first stage of increasing returns is noticed, followed by one of decreasing returns. The microeconomics belongs to the economy, and focuses on the study of the way in which individual agents behave, such as companies , employees, investors and consumers, in addition to the markets themselves.