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Variable Costs are business expenses that fluctuate with the level of production or activity, like raw materials, staff, electricity, and equipment. In contrast, “fixed costs” are recurring expenses like rent, insurance, and salaries that typically remain the same over time, while “semi-variable costs” differ over time but not significantly, like sales commissions.

A company’s overall variable cost is calculated by adding all fluctuating expenses. Variable costs can impact how a business spends its money; if they are low, more can be spent in other areas since it does not need to be ready for high, unforeseen expenses. However, not all variable costs rise with increased production; some decrease, like raw materials where a lower price can be negotiated based on purchasing a higher volume.