Variable cost Variable costs are expenses that change in direct proportion to the activity of a business . Along with fixed costs , variable costs make up the two components of total cost . Direct Costs , however , are costs that can be associated with a particular cost object . Not all variable costs are direct costs , however ; for example , variable manufacturing overhead costs are variable costs that are not a direct costs , but indirect costs . Explanation For example , a manufacturing firm pays for raw materials . When activity is decreased , less raw material is used , and so the spending for raw materials falls . When activity is increased , more raw material is used and spending therefore rises . Note that the changes in expenses happen with little or no need for managerial intervention . There are many expense categories in business that consist of both fixed and variable components , like electricity . A company will pay for line rental and maintenance fees each period regardless of how much power gets used . And some electrical equipment ( air conditioning or lighting ) may be kept running even in periods of low activity . These expenses can be regarded as fixed . But beyond this , the company will use electricity to run plant and machinery as required . The busier the company , the more the plant will be run , and so the more electricity gets used . This extra spending can therefore be regarded as variable . In retail the cost of goods is almost entirely a variable cost ; this is not true of manufacturing where many fixed costs , such as depreciation , are included in the cost of goods . Although taxation usually varies with profit , which in turn varies with sales volume , it is not normally considered a variable cost . See also Cost accounting Fixed cost Categories : Costs | Management accounting | Economics of production In other languages : Deutsch | עברית | Magyar | Português | Slovenčina 