Variable Costing: Method, Formula & Advantages

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  • 0:06 What Is Variable Costing?
  • 0:40 Variable Cost Examples
  • 2:41 Advantage of Variable Costs
  • 3:02 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

This lesson discusses variable costing. It explains how variable costs are determined, how they are calculated, and advantages of variable costing. Examples of variable costing are also provided.

What Is Variable Costing?

Variable costing is a method that determines the relationship between production and costs. To understand variable costing, you must understand what variable costs are and how they are calculated.

Variable costs are expenses for items that are used in manufacturing that go up and down as a result of production and manufacturing going up and down. Therefore, if a company increases production, they will need more supplies, which will increase the amount of variable costs. Variable costs can also apply to services that use products in the course of doing business.

Variable Cost Examples

Let's imagine you own a hair salon that specializes in hair coloring. You normally charge $100 for a typical color. This service will require $10 in color and supplies. These costs are considered your variable costs. They are correlated directly to the amount of hair color services your salon provides.

You noticed business at your salon was particularly busy right before the holidays in November and December. In October, your salon did 50 hair color treatments, costing $500 in color and supplies and bringing in $5000 in revenue. However, in November, your salon provided color for 75 customers, resulting in $750 in color and supply expenses and $7500 in revenue. In December, business jumped again. Your salon saw 120 color clients, causing color and supply expenses to jump to $1200. However, you also had an increase in revenue, bringing in $12,000 in sales.

Because variable costs reflect the supplies and materials needed in the process of production, the costs are directly tied to production volume.

When production increases variable costs also increase and vice versa.

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