Expenses that change in direct proportion to production volume or business activity. These costs increase when you produce more and decrease when you produce less, such as raw materials and direct labor.
Developed alongside fixed-cost terminology in early 1900s manufacturing as accountants needed to track costs that fluctuated with production. The concept became crucial during World War I when factories had to rapidly scale production up and down.
Variable costs reveal the true 'marginal cost' of growth—if your variable costs are 60% of revenue, you keep 40 cents of every new dollar! This is why understanding your variable cost percentage is more important than your absolute profit number for making growth decisions.
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