Since the price of raw materials varies according to the volume of manufacturing, it is a variable cost. To generate the specified output, more raw materials are needed as production rises; conversely, as production falls, less raw materials are required. Accordingly, the price of raw materials will change depending on the volume of manufacturing. Direct labor costs, sales commissions, and shipping fees are other instances of variable costs. As production or sales volume changes, these expenses fluctuate upwards or downwards.
Contrarily, despite changes in output or sales volume, fixed costs remain constant. These expenses consist of rent, wages, insurance deductibles, and property taxes. Although they could rise with time, these expenses are independent of output or sales volume. They are not proper illustrations of variable costs as a result.
Depending on the type of insurance, costs might be either fixed or variable. For instance, property insurance has a fixed cost because the premium never changes regardless of the volume of sales or the degree of output. However, as the premium for liability insurance might change depending on the level of risk connected to the business operations, it may be a variable cost. In this instance, the premium increases as the risk increases and decreases as the risk decreases. To evaluate whether an expense is variable or fixed, it is crucial to examine the type of insurance and how it relates to the volume of production or sales.
In conclusion, the price of raw materials is the best illustration of a variable cost. This expense is a true variable cost because it directly fluctuates with the volume of output. Direct labor costs, sales commissions, and shipping fees are other instances of variable costs. On the other hand, fixed costs are constant independent of the volume of sales or the rate of production. Insurance costs can be classified as either fixed or variable costs, thus it’s critical to consider the type of insurance and how it relates to output or sales volume.