Question

Explain with an example, the meaning of variable costs.

Explain variable cost with suitable examples.

Answer 1

1. Variable costs are those costs that vary in amount with changes in the level of output or activity.
2. Such costs increase and decrease in the same proportion in which the level of output increases or decreases.
3. Variable costs vary in total amount but remain constant per unit of production.
4. The costs incurred on raw materials, power, fuel, and the and the wear and tear of machines are examples of variable costs.
5. For example, when the level of output increases from 5,000 units to 6,000 units, the amount of variable costs increases from ₹ 25,000 to ₹ 30,000.
6. In this case, the variable cost per unit remains unchanged at ₹ 5 (25,000 + 5,000 and 30,000 + 6,000).
7. Thus, there is a linear relationship between the volume of production and total variable costs.