Definition

A variable cost is an expense incurred by a company that varies depending on the sales or production of the company. Variable costs can rise or fall depending on the production or sales volume of a company. For instance, such costs increase as production goes up and reduce as production falls.

Example

For a SaaS company, certain costs of services are primarily variable costs, for example:a. Hosting costsb. Cost towards employees responsible for ensuring a running production environment. Such teams are also known as infrastructure teams or DevOpsc. Pay towards employees who run customer support for the applicationd. Fees paid for third-party software that is part of the delivered producte. Any other employee costs needed for the ongoing product or service delivery

Why it matters

Variable costs are crucial for a business since these can have a significant impact on how a company allocates its funds. Variable costs may be high in businesses that undergo frequent and major changes. These costs can differ based on the strategic goals of a business. Variable costs are an indispensable part of any company's financial decision-making process. These costs are generally more relevant and attract management involvement as against fixed costs that have already been incurred and are generally irreversible. Variable cost monitoring allows companies to make profitability comparisons across different units to get meaningful insights.

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