What is a variable expense?

Budget your fixed expenses first, because they make up the majority of your budget and are usually set for longer periods of time. Your variable expenses fluctuate monthly and are easy to adjust as you go, so it’s easier to plan these around your fixed expenses. If you need to start cutting back on costs, look at both your fixed and variable expenses. Devoting a Saturday afternoon to reviewing all of your subscriptions, insurance plans and recurring monthly bills may help you trim hundreds of dollars from your fixed monthly budget. Your health insurance, car insurance, life insurance, and homeowners or renters insurance are also examples of fixed costs. You would have to spend several hours researching alternate plans to change these monthly payment amounts.

You’d get $648.33, and could safely assume your average grocery bill might be around $650 per month. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes. Variable expenses aren’t always predictable, but they often allow more flexibility in your budget. We believe everyone should be able to make financial decisions with confidence. 1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit.

With the envelope budgeting system, you’ll divide your income into several categories, such as bills, groceries, gasoline, and entertainment. Some of the categories may include variable expenses, while others are fixed. After deciding how much to spend on each category, put that amount of cash into an envelope and spend no more on that category. This approach involves using cash, but you can adapt it using mobile apps. Calculating variable costs can be done by multiplying the quantity of output by the variable cost per unit of output. However, if the company doesn’t produce any units, it won’t have any variable costs for producing the mugs.

The marginal cost will take into account the total cost of production, including both fixed and variable costs. Since fixed costs are static, however, the weight of fixed costs will decline as production scales up. Variable costs are expense definition and meaning directly related to the cost of production of goods or services, while fixed costs do not vary with the level of production. Variable costs are commonly designated as COGS, whereas fixed costs are not usually included in COGS.

How a Variable Expense Works

Or you could rely on the good old envelope budgeting method, creating different envelopes for income and expenses. Because variable expenses are not steady, it might be hard to anticipate what you’ll pay for them each month. But examining your transaction history can help you learn your patterns and be aware of the general cost so you can adjust your budget if necessary. Even if you can’t control prices, you still have the power to set a limit on how much and how often you spend. Separate your variable expenses from your fixed expenses to estimate how much you spend on the former.

  • The Variable Expense Ratio enables analysis of the profitability and cost efficiency of the business.
  • Variable expenses are costs that change over time, such as groceries or movie tickets.
  • These are costs composed of a mixture of both fixed and variable components.
  • It can also help with deciding how much of your income to commit to debt repayment, saving and other financial goals.
  • The athletic company also won’t incur some types labor if it doesn’t produce more output.

If you pay for a gym membership or streaming services, for example, those costs might stay the same month to month. Aside from being roughly the same amount each month, fixed expenses may also be paid on or around the same date each month. Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments. If you budget by paycheck or schedule automatic bill payments, having bills due at roughly the same time can help with avoiding late payments and the fees that go along with them.

Benefits of setting credit card spending limits for yourself

On the other hand, you might use the “pay yourself first” budget to prioritize savings or the zero-based budget to ensure your money goes toward various goals. The Contribution Margin provides us with information about the fixed costs, while the Variable Expense Ratio includes information about the variable costs. Both metrics are crucial for cost analysis and decision-making, with a lower variable expense ratio and a higher contribution margin indicating a more favorable financial position. Variable expenses are costs that fluctuate directly to changes in production or sales. These costs increase as a company produces and sells more goods or services and decrease when production or sales decline. Variable expenses commonly include materials, labor, and direct overhead for producing goods or services.

Variable does not necessarily mean discretionary

In fact, many of your budget items might be variable expenses rather than fixed, which can make budgeting for them a little more complicated. Note that variable expenses are not considered “variable” because they are discretionary or unnecessary, but because they are fluctuating. For example, your grocery bill can differ from month to month, which makes it variable, but it is not discretionary because it’s not an expense you can do without.

What Are Variable Expenses and How Can I Budget for Them?

Keeping track of your variable expenses is important as they can add up quickly and impact your overall financial health. Sometimes, no matter how much you control your variable expenses, they still crop up unexpectedly and cause financial strain. You can mitigate this with a rainy day or emergency fund or by trimming your discretionary expenses. ​Another tactic for managing an unexpected increase in variable expenses is to be prepared to trim back any discretionary expenses to cover the variable expenses. When it comes to groceries, you can buy in bulk or look for generic brand replacements at lower prices. For your utility bills, you can take small steps such as shutting off the lights and adjusting your temperature by a few degrees.

Writers and editors and produce editorial content with the objective to provide accurate and unbiased information. A separate team is responsible for placing paid links and advertisements, creating a firewall between our affiliate partners and our editorial team. Our editorial team does not receive direct compensation from advertisers. Kim Porter is a freelance writer who has written about personal finance topics for AARP Magazine, Bankrate, Credit Karma, U.S. News & World Report, Reviewed and more. She co-wrote the e-book “Future Millionaires’ Guidebook” and used advice from the book to pay off $145,000 in student loans.

Whether a firm makes sales or not, it must pay its fixed costs, as these costs are independent of output. Therefore, a company can use average variable costing to analyze the most efficient point of manufacturing by calculating when to shut down production in the short-term. A company may also use this information to shut down a plan if it determines its AVC is higher than its. In general, it can often be specifically calculated as the sum of the types of variable costs discussed below. Variable costs may need to be allocated across goods if they are incurred in batches (i.e. 100 pounds of raw materials are purchased to manufacture 10,000 finished goods).

She has worked as a personal finance editor, writer, and content strategist covering banking, credit cards, insurance and investing. As a small business owner and former financial advisor, Daphne has first-hand experience with the challenges individuals face in making smart financial choices. While credit card debt is pretty common (51% of all credit card accounts carry a balance), that doesn’t mean it’s unavoidable. And, considering the average credit card APR is a whopping 14.51%, it’s wise to avoid credit card debt at all costs to improve your financial wellness.

Take, for example, your electricity bill, which can vary drastically from season to season if you have air conditioning. The term sunk cost refers to money that has already been spent and can’t be recovered. While sunk costs may be considered fixed costs, not all fixed costs are considered sunk. For instance, a fixed cost isn’t sunk if a piece of machinery that a company purchases can be sold to someone else for the original purchase price. Various individuals and entities in the business world use the variable expense ratio. Business owners and managers utilize it to assess cost structures and make pricing decisions, while financial analysts rely on it for evaluating a company’s financial health.

This may hold true for tangible products going into a good as well as labor costs (i.e. it may cost overtime rates if a certain amount of hours are worked). Consider wholesale bulk pricing that prices goods by tiers based on quantity ordered. There is also a category of costs that falls between fixed and variable costs, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components.

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