On the income statement, which of the following would be classified as a variable cost?

On the income statement, which of the following would be classified as a variable cost?

On the income statement, which of the following would be classified as a variable cost?

  1. Promotion Expense
  2. Depreciation Expense
  3. R&D Expense
  4. Direct Labor Expense

In an income statement, Direct Labor Expense can be considered as the variable cost since it can change from time to time. When you see the rise in production and sales, variable cost increases and when there’s a decline in production and sales, variable cost decreases.  

There’s a difference between salary and wage. Salary means you get the fixed amount in a month or a week. But direct labor expenses means the more you work the more you earn and vice versa.

What is variable cost?

There are two types of costs in a company: variable and fixed. The variable cost of operating is a cost that changes in direct proportion to changes in production or sales. If output rises, the variable cost rises, and if output falls, the variable cost falls. A fixed expense does not change with changes in volume but remains constant regardless of the amount of activity. It is important to know when your variable costs will increase to plan accordingly in an agile manufacturing environment.

Variable costs change based on the volume output, such as raw materials or labor. Fixed costs do not depend on volume output but rather are incurred regardless of how much is produced. However, some expenses may vary with production levels and therefore be considered either fixed or variable depending on the situation; for example, utilities might go up if you produce more products in your factory.

Understanding these distinctions is important because it helps one understand where to focus their efforts when trying to reduce cost: cutting back on overhead or reducing variable costs by changing inputs?  It’s all about determining which type of cost will have the most impact given available resources. 

How to calculate variable cost?

In general, when calculating variable costs, formula_1 is multiplied by the total number of units produced or consumed during a particular time period: formula_2. Formula_3 represents production quantity, and formula_4 represents average price per unit. By dividing the output by 100, you get a percentage that tells you how much of your production was spent on materials. 

Total Variable Cost = Total Quantity of Output x Variable Cost Per Unit of Output

Example of Variable Cost

Suppose you work for a company on a salary basis. The salary you get is the fixed cost because you get the fixed amount of money every month that does not change. And if you work overtime, you get the extra amount from the salary, that can be considered as the variable cost since it may change from time to time. 

Fixed cost vs Variable Cost

So now can you answer it? On the income statement, which of the following would be classified as a variable cost?

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