What are variable costs?
Variable costs are business costs that rise and fall in line with how much you sell or produce, such as materials, packaging, delivery and sales commission.
What variable costs mean
Variable costs change with your level of activity. Sell twice as many units and your variable costs roughly double; sell nothing and they fall to near zero. They are the opposite of fixed costs, such as rent and insurance, which stay the same whatever you sell.
Typical variable costs include raw materials, stock bought for resale, packaging, shipping, card processing fees, marketplace commission, freelance labour paid per job and sales commission. Many of them make up your cost of goods sold.
Example
An online candle business sells each candle for £24 (excluding VAT). For each one it pays:
- Wax, wick and fragrance: £4.50
- Jar and packaging: £2.50
- Delivery: £3.80
- Marketplace and payment fees: £2.20
Variable cost per candle is £13.00, leaving a contribution of £11.00 per candle towards fixed costs and profit. If fixed costs (unit rent, software, insurance, the owner's salary) are £3,300 a month, the business needs to sell 300 candles a month to break even. Every candle after that adds £11 of profit.
| Candles sold | Revenue | Variable costs | Contribution |
|---|---|---|---|
| 200 | £4,800 | £2,600 | £2,200 |
| 300 | £7,200 | £3,900 | £3,300 |
| 500 | £12,000 | £6,500 | £5,500 |
Why it matters for your business
Knowing your variable cost per sale tells you what each extra sale is really worth. It shows whether a discount still makes money, how much you can spend to acquire a customer, and how a rise in delivery prices will hit your gross margin. Businesses with high variable costs and thin contribution need volume; businesses with low variable costs can grow profit quickly once fixed costs are covered.
Variable vs fixed costs
Some costs are semi-variable: a phone contract with a fixed monthly fee plus usage, or staff who are salaried but paid overtime in busy months. Splitting them into fixed and variable parts gives you a more accurate picture. Good management accounts in Xero or QuickBooks can be set up to report contribution by product or channel.
Reviewing variable costs every quarter is worthwhile. Supplier prices, courier rates and platform fees change often, and a small rise across hundreds of orders can quietly wipe out the profit on a product line. Renegotiating, switching couriers or adjusting prices restores the margin.
Common questions
It depends on how staff are paid. Salaried staff are usually treated as fixed costs because you pay them whatever you sell. Hourly, piece-rate or agency staff whose hours rise and fall with demand are variable costs.
Yes, if they are incurred wholly and exclusively for the business. Materials, delivery, fees and commission are all allowable expenses. Whether a cost is fixed or variable has no effect on tax; it is a management distinction.