What Is A Variable Expense? How They Affect Your Budget
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. There are a couple of different types of variable expenses, and the strategies for budgeting for them differ a bit. There are plenty of nonessential costs that you can consider cutting altogether.
- If you know you have a $600 expense for car insurance every six months, setting aside $100 each month will ensure you’ve saved up for that bill.
- The Variable Expense Ratio enables analysis of the profitability and cost efficiency of the business.
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- A variable cost is a corporate expense that changes in proportion to how much a company produces or sells.
- If you can cut back on some variable costs in addition to your fixed monthly bills, you’ll free up more money to save for retirement, build an emergency fund, pay off debt, or invest.
In contrast, costs of variable nature are generally more difficult to predict, and there is usually more variance between the forecast and actual results. If this list of true expenses puts your usual monthly budget into the negative, pull out that red pen and do some slashing. If you already have high-interest debt, you can check out our blog post on how to pay off credit card debt.
Firstly, it allows you to identify areas where you may be overspending and find ways to reduce your expenses. Secondly, it provides a clear picture of your spending habits and helps you make informed financial decisions. Finally, tracking your variable expenses can help you set realistic financial goals and create a budget that works for you. If the total variable expenses incurred were $100,000, the variable cost per unit is $100.00 per hour.
Understanding Variable Expenses
For example, using this method you would first budget for your rent, debt repayments, utility bills, basic grocery bill, etc. before budgeting for or spending any money on optional purchases. From month to month, you probably know how much you spend on fixed expenses because these don’t change often. If you want to save money on variable expenses, it may require some lifestyle adjustments. For example, cutting back or cutting out things like dinners out or new clothes are some simple ways to save.
- You would have to spend several hours researching alternate plans to change these monthly payment amounts.
- Total variable costs are a different breed because you don’t always know how much your bill will be each month.
- It’s important to note that some expenses can fall into both categories.
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- Insurance is a fixed expense that protects your business from risks such as property damage, liability, and theft.
However, the cost cut should not affect product or service quality as this would have an adverse effect on sales. By reducing its variable costs, a business increases its gross profit margin or contribution margin. 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. In this way, a company may achieve economies of scale by increasing production and lowering costs. The Contribution Margin provides us with information about the fixed costs, while the Variable Expense Ratio includes information about the variable costs.
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Your variable expenses fluctuate monthly and are easy to adjust as you go, so it’s easier to plan these around your fixed expenses. Your health insurance, car insurance, life insurance, and homeowners or renters insurance are also examples of fixed costs. You would have to spend several hours researching alternate plans to change these monthly payment amounts. When you throw variable expenses into a monthly budget, it’s easy to get confused. Unlike fixed expenses, you must estimate your variable monthly costs and adjust on the fly if they rise significantly. While it may be tempting to overspend on variable expenses, it’s important to remember that these expenses can add up quickly and have a significant impact on one’s overall financial health.
By creating a budget that accounts for variable expenses and setting realistic goals, individuals can take control of their finances and make smart decisions about their spending. Fixed expenses are those that stay the same each month, such as rent and loan payments. If we talk about what are variable expenses, these are the expenses that fluctuate from month to month, such as utilities, fuel, and inventory costs. The average variable cost, or “variable cost per unit,” equals the total variable costs incurred by a company divided by the total output (i.e. the number of units produced).
Examples of Variable Expenses
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. A variable expense is a cost that alters in conjunction with some type of activity. Other variable expenses are commissions, billable labor, piece rate labor, and credit card fees. Many other expenses, such as rent expense, are fixed within a certain activity range. There’s no one best way to budget for variable expenses, so you’ll need to find a system that works for you.
The Importance of Tracking Your Variable Expenses
Again, the advantage here is that planning out your budget may be easier to do with recurring bill payments. If you budget by paycheck or schedule automatic bill payments, having bills due at roughly the same time can help with avoiding late payments and the fees that go along with them. If companies ramp up production to meet demand, their variable costs will increase as well.
It can help businesses understand how efficient they are at managing their variable costs, make pricing decisions, and evaluate the impact of changes in sales volume on their bottom line. Some expenses fluctuate from month to month, while others remain the same. Your payment for rent typically remains the same monthly, but how much you spend on groceries or your monthly utility bill changes constantly. Monthly expenditures that generally remain the same are known as fixed expenses, while variable expenses are those that change constantly. When it comes to managing your finances, understanding the difference between fixed and variable expenses is crucial.
The envelope system is one budgeting method that can help you balance your variable expenses. You start by assigning categories such as entertainment and transportation to individual envelopes. Then, allocate a certain amount of money to each one and spend only what you’ve designated. This way, you’ll know exactly how much cash you have to cover these shifting expenses.
With the zero-based budgeting approach, every dollar is allocated toward a purpose. The goal is for your income minus expenses to equal zero at the end of the month. To create this type of budget, write down how much you take home each month. Although you won’t know how much you’ll spend on variable expenses, allocate a certain budget toward each. The variable costs might include expenses but also debt repayments and savings. Variable expenses, on the other hand, can be more difficult to predict, since they can be influenced by so many different factors related to production and the market.
While you could theoretically change your monthly mortgage payment by refinancing your loan or by appealing your property tax assessment, this is not an easy switch. Variable expenses can be intimidating because you don’t know what the bill will be every month. However, they aren’t an absolute mystery, as there is historical data to help you determine debt financing definition what you can reasonably expect to pay every period. I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.
Fixed Vs. Variable Expenses: What’s The Difference?
This means that variable costs increase as production rises and decrease as production falls. Some of the most common types of variable costs include labor, utility expenses, commissions, and raw materials. As you evaluate your variable expenses versus your fixed expenses, take some time to consider necessary items in your budget that fluctuate each month. It is more common for these items to be discretionary or areas where you can trim expenses with some changes to your habits. Other variable expenses are necessities, such as fuel to get you to and from work or surprise car repairs and ongoing maintenance fees. One of the key differences between variable and fixed expenses is that fixed expenses are often necessary to keep your business running, while variable expenses can be more discretionary.