Variable Cost

Some prices remain the same over long periods of time, no matter what production levels you achieve. This category is known as fixed costs. Other expenses change with your level of production, or frequently see their prices move around. These costs that move around a lot are known as variable costs.

At your factory, which produces fur-lined underwear, you pay your assembly-line workers $48,000 a year, or $4,000 a month. You pay that amount no matter how many pairs of underwear you crank out. On a regular day, a single worker might make 1,000 pairs of undies. But if the fur-lining machine goes down for repairs, and they make 250 pairs that day, you still owe them the same salary. The cost is fixed. It doesn't change.

Other examples of fixed costs include the rent for your factory and your company's insurance. You have to pay the same amount every month, no matter what.

However, other costs are variable. They change as production changes...like the fur that goes into the underwear. It costs $1 to buy enough fur for one pair of underwear. If you make 1,000 pairs in a day, that cost you $1,000. If you make 250 pairs in a day, it costs $250. The costs vary depending on the situation. Variable costs.