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Variable cost

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Definition of Variable cost

Variable Cost Image 1

Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.


Variable cost

A cost that increases or decreases in proportion with increases or decreases in the volume of production of goods or services.


variable cost

a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis


Variable cost

A cost that changes in amount in relation to changes in a related activity.
Variance
The difference between an actual measured result and a basis, such as a budgeted amount.



Related Terms:

Semi-variable costs

costs that have both fixed and variable components.


Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.



variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns


variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)


Variable Cost Image 2

variable costs

costs that change as the level of output changes.


Contribution margin

The difference between variable revenue and variable cost.


Contribution

Also the difference between the selling price and variable costs, which can be expressed either per
unit or in total.


Cost behaviour

The idea that fixed costs and variable costs react differently to changes in the volume of
products/services produced.


Optimum selling price

The price at which profit is maximized, which takes into account the cost behaviour of fixed and variable costs and the relationship between price and demand for a product/service.


overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.


break-even chart

a graph that depicts the relationships among revenues, variable costs, fixed costs, and profits (or losses)


carrying cost

the total variable cost of carrying one unit of
inventory in stock for one year; includes the opportunity
cost of the capital invested in inventory


contribution margin

the difference between selling price and
variable cost per unit or in total for the level of activity; it
indicates the amount of each revenue dollar remaining
after variable costs have been covered and going toward
the coverage of fixed costs and the generation of profits


Variable Cost Image 3

contribution margin ratio

the proportion of each revenue dollar remaining after variable costs have been covered;
computed as contribution margin divided by sales


cost structure

the relative composition of an organization’s
fixed and variable costs



direct costing

see variable costing


linear programming

a method of mathematical programming used to solve a problem that involves an objective function and multiple limiting factors or constraints long-term variable cost a cost that was traditionally viewed as a fixed cost


ordering cost

the variable cost associated with preparing,
receiving, and paying for an order


product contribution margin

the difference between selling price and variable cost of goods sold


relevant range

the specified range of activity over which a
variable cost per unit remains constant or a fixed cost remains
fixed in total; it is generally assumed to be the normal
operating range of the organization


Contribution margin

The margin that results when variable production costs are subtracted
from revenue. It is most useful for making incremental pricing decisions
where a company must cover its variable costs, though perhaps not all of its fixed
costs.


Break-Even Analysis

An analytical technique for studying the relationships between fixed cost, variable cost, and profits. A breakeven chart graphically depicts the nature of breakeven analysis. The breakeven point represents the volume of sales at which total costs equal total revenues (that is, profits equal zero).


Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.


Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.


Agency costs

The incremental costs of having an agent make decisions for a principal.



All-in cost

Total costs, explicit and implicit.


Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.


Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.


Carring costs

costs that increase with increases in the level of investment in current assets.


Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.


Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.


Cost of capital

The required return for a capital budgeting project.


Cost of carry

Related: Net financing cost


Cost of funds

Interest rate associated with borrowing money.


Cost of lease financing

A lease's internal rate of return.


Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.


Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.


Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .


Endogenous variable

A value determined within the context of a model.


Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.


Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.


Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.


Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).


Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.


Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.


Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.


Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.


Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.


Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.


Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing
the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than
the financing cost; negative carry means that the financing cost exceeds the yield earned.


Normal random variable

A random variable that has a normal probability distribution.


Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.


Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.


Price impact costs

Related: market impact costs


Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.


Replacement cost

cost to replace a firm's assets.


Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.


Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.


Shortage cost

costs that fall with increases in the level of investment in current assets.


Sunk costs

costs that have been incurred and cannot be reversed.


Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.


Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.


True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.


Variable

A value determined within the context of a model. Also called endogenous variable.


Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.


Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.


Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.


Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.


Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.


Variable rate loan

Loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.


Weighted average cost of capital

Expected return on a portfolio of all the firm's securities. Used as a hurdle
rate for capital investment.


Cost basis

An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.


Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.


MACRS (Modified Accelerated Cost Recovery System)

A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).


VARIABLE EXPENSES

Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.


Absorption costing

A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.


Activity-based costing

A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.


Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.


Cash cost

The amount of cash expended.


Cost

A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
typically in monetary terms.


Cost centre

A division or unit of an organization that is responsible for controlling costs.


Cost control

The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.


Cost driver

The most significant cause of the cost of an activity, a measure of the demand for an activity
by each product/service enabling the cost of activities to be assigned from cost pools to products/services.


Cost object

Anything for which a measurement of cost is required – inputs, processes, outputs or responsibility centres.


Cost of capital

The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
cost of equity and debt weighted by the mix of equity and debt.


Cost of goods sold

See cost of sales.


Cost of manufacture

The cost of goods manufactured for subsequent sale.


Cost of quality

The difference between the actual costs of production, selling and service and the costs that would be incurred if there were no failures during production or usage of products or services.


Cost of sales

The manufacture or purchase price of goods sold in a period or the cost of providing a service.


Cost-plus pricing

A method of pricing in which a mark-up is added to the total product/service cost.


Cost pool

The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.


Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.


Direct costs

costs that are readily traceable to particular products or services.


Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.


Full cost

The cost of a product/service that includes an allocation of all the (production and
non-production) costs of the business.


Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.



 

 

 

 

 

 

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