You might normally treat yourself to one muffin each week, spending $4 on average per month, but some months you might indulge more and spend $10 or $15. Budget expenses can either remain the same every month or they can fluctuate. Variable expenses are those that can change based on things like weather, cost, demand, or many other variables. The cost to package or ship a product will only occur if certain activity is performed. Therefore, the cost of shipping a finished good varies (i.e. is variable) depending on the quantity of units shipped. The athletic company also won’t incur some types labor if it doesn’t produce more output.

You’d get $648.33, and could safely assume your average grocery bill might be around $650 per month. You could change this expense by moving to a cheaper home or by getting a roommate, but these are major lifestyle changes. Variable expenses aren’t always predictable, but they often allow more flexibility in your budget. We believe everyone should be able to make financial decisions with confidence. Writers and editors and produce editorial content with the objective to provide accurate and unbiased information. A separate team is responsible for placing paid links and advertisements, creating a firewall between our affiliate partners and our editorial team.

Generally, a lower variable expense ratio is better than a higher one because it indicates that the company can be more profitable with scaling. One way is to compare it to previous periods to see if the company is becoming more or less efficient. Another way is to compare it to other companies in the same industry to see how well the company performs relative to its peers.

When making a budget, it’s important to know how to separate fixed expenses from variable expenses. Other ways of budgeting for unreliable variable expenses could include zero-based budgeting where you assign every dollar from your income toward expenses and savings. Or you could rely on the good old envelope budgeting method, creating different envelopes for income and expenses. Separate your variable expenses from your fixed expenses to estimate how much you spend on the former. As with all expenses, find out how variable expenses affect your overall financial health.

Previously, she wrote about personal credit for Bankrate and She is passionate about providing accessible content to enhance financial literacy. She graduated from the University of Texas at Austin with a bachelor’s degree in journalism, and has worked in the newsrooms of KUT and the Austin Chronicle. When not working, she is probably paddle boarding, hopping on a flight or reading for her book club. Here are some examples of fixed expenses that can also be referred to as a corporate expense when grouped together.

For example, if you’re a manufacturer, you may reduce the manufacturing company’s cost by installing the right machinery instead of relying on labor for producing the goods. While variable costs tend to remain flat, the impact of fixed costs on a company’s bottom line can change based on the number of products it produces. The price of a greater amount of goods can be spread over the same amount of a fixed cost.

Examples of Fixed Expenses

Variable expenses fluctuate from month to month, often increasing as the sale volume or output increases, while fixed expenses such as rent or loan payments stay the same each month. Some examples of variable expenses include utilities, fuel, and inventory costs. You can save money on variable expenses by taking advantage of economies of scale, automating your business processes, streamlining your workflows, and using aftermarket consumables.

  • You are the owner of a family-owned restaurant, «Cafe Delight.» You want to understand your business’s cost structure and assess your menu items’ profitability.
  • She graduated from the University of Texas at Austin with a bachelor’s degree in journalism, and has worked in the newsrooms of KUT and the Austin Chronicle.
  • Our partners cannot pay us to guarantee favorable reviews of their products or services.
  • In this case, suppose Company ABC has a fixed cost of $10,000 per month to rent the machine it uses to produce mugs.
  • In general, it can often be specifically calculated as the sum of the types of variable costs discussed below.

Amy asks for your opinion on whether she should close down the business or not. Additionally, she’s already committed to paying for one year of rent, electricity, and employee salaries. Knowing how costs behave when sales or other activities change will allow you to better understand how a company’s gross profit and net income will change. It also allows you to quickly calculate a product’s contribution margin and to estimate the company’s break-even point. An expense is variable when its total amount changes in proportion to the change in sales, production, or some other activity. In other words, a variable expense increases when an activity increases, and it decreases when the activity decreases.

Variable expenses are costs that change over time, such as groceries or movie tickets. Because these costs might fluctuate over a week, month or year, it can be challenging to pinpoint what you’ll spend. Some variable expenses are vital, like groceries, and others, like movie tickets, are optional. While these costs will fluctuate, it’s helpful to have an estimate of what you’ll need to spend.

What Is the Formula for Total Variable Cost?

If Amy did not know which costs were variable or fixed, it would be harder to make an appropriate decision. In this case, we can see that total fixed costs are $1,700 and total variable expenses are $2,300. The upside of having variable expenses in your budget is that you have more control over them than you do with fixed expenses. But the amount you pay in any given month could be different from previous payments or ones you’ll make in the future.

What is an example of a fixed expense?

The amount you spend each time may vary, but you’re not paying for those expenses monthly. Instead, you may budget for those kinds of variable expenses using sinking funds—money that you set aside for this purpose. It’s important to understand how much of your expenses are fixed and how much are variable so you can budget your money properly. Fixed expenses are always easier to account for because they don’t fluctuate as variable expenses do.

Our editorial team does not receive direct compensation from advertisers. CreditWise Alerts are based on changes to your TransUnion and Experian® credit reports and information we find on the dark web. It’s wise to budget for everything else first, then use any leftover money to budget for these optional categories. Variable expenses can be discretionary — but they can also be necessary. Many or all of the products featured here are from our partners who compensate us.

What Are Some Examples of Variable Costs?

There is also a category of costs that falls between fixed and variable costs, known as semi-variable costs (also known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both fixed and variable components. Costs are fixed for a set level of production or consumption and become variable after this production level is exceeded. As you look at your upcoming bills, you should already know exactly what you’ll pay for fixed expenses. For example, fixed-rate mortgages are among the most common ways to buy a home because the monthly payment remains the same for the entire life of the loan.

Additionally, sales commissions and bonuses can also fluctuate from month to month. Fixed expenses don’t change from month to month, which makes it easier to know medical billing supervisor job description whether you have money to cover them. In this case, suppose Company ABC has a fixed cost of $10,000 per month to rent the machine it uses to produce mugs.

How to Find Variable Expenses?

As a small business owner and former financial advisor, Daphne has first-hand experience with the challenges individuals face in making smart financial choices. And because they fluctuate, variable expenses can be difficult to budget for. This is where calculating the average cost of your variable expenses can come in handy. Raw materials are the direct goods purchased that are eventually turned into a final product. If the athletic brand doesn’t make the shoes, it won’t incur the cost of leather, synthetic mesh, canvas, or other raw materials. In general, a company should spend roughly the same amount on raw materials for every unit produced assuming no major differences in manufacturing one unit versus another.

variable expenses definition

Those fixed monthly subscription services — Netflix, Spotify, Hulu and more — can really add up, so you might consider cutting some of them. Additionally, there may be opportunities to lower them by comparing other options. Perhaps a company will allow you to bundle them and save a chunk of cash versus your current providers.