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Definition

Variable costs are expenses that change in proportion to the activity of a business, and can be aggregated into a total or expressed on a per-unit basis. Variable costs are assumed to be relatively constant on a per-unit basis. Total variable costs increase directly and predictably with unit sales volume. Fixed costs, on the other hand, are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. In a survey of nearly 200 senior marketing managers, 60% responded that they found variable and fixed costs very useful.[1]

Purpose

Marketers need to have an idea of how costs divide between variable and fixed. This distinction is crucial in forecasting the earnings generated by various changes in unit sales, and thus the financial impact of proposed marketing campaigns. It is also fundamental to an understanding of price and volume trade-offs.

Construction

      Total costs ($) = Fixed costs ($) + Total variable costs ($)
      Total variable costs ($) = Unit volume (#) x Variable cost per unit ($)

References

  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>


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