Variable costs or direct costs are expenses that change in direct proportion to the activity of a business. Along with fixed costs, variable costs make up one of the two components of total cost.

Explanation
For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.

There are many expense categories in business that consist of both fixed and variable components, like electricity. A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.

In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.

Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
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Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.Variable costs are sometimes called unit-level costs as they vary with the number of units produced.


For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.
A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.
In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.
Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.
In most of the concerns, salary is paid on monthly rates. Though there may exist a labour work norm based on which the direct cost (labour) can be absorbed in to cost of the product, salary cannot be termed as variable in this case.
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In cost accounting, a part of management accounting, fixed costs are expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales. Unit fixed costs, called average fixed costs (AFC), decline with volume, following a rectangular hyperbola as the inverse of the volume of production: AFC = FC/N.
Variable costs by contrast change in relation to the activity of a business such as sales or production volume. In the example of the retailer, variable costs may primarily be composed of inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable. In manufacturing, direct material costs are an example of a variable cost. An example of variable costs are the prices of the supplies needed to produce a product.
Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs.
In microeconomics and business, the difference between fixed costs and variable costs (and the related terms average cost and marginal cost) is crucial, as each will influence production decisions for profit maximization differently. In the most simple cases, fixed costs do not affect production decisions, because they cannot be changed, and management will choose to produce if sales prices are above the cost of each additional unit (marginal cost).
Fixed costs should not be confused with sunk costs. From a pure economics perspective, fixed costs may not be fixed in the sense of invariate; they may change, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, and these would not be considered part of variable costs.
It is important to understand that fixed costs are "fixed" only within a certain range of activity or over a certain period of time. If enough time passes, all costs become variable. Similarly, not all indirect costs are fixed costs; for example, advertising expenses or labour costs are indirect costs that are variable over a slightly longer time frame, as they may not be subject to change in the short term, but may be easily adjustable over a longer time frame. For example, a firm may not be able to vary the number of employees (and hence labour costs) in the short term due to contract obligations, but be able to lay employees off or otherwise change these costs.
In accounting terminology, fixed costs will broadly include all costs (expenses) which are not included in cost of goods sold, and variable costs are those captured in costs of goods sold. The implicit assumption required to make the equivalence between the accounting and economics terminology is that the accounting period is equal to the period in which fixed costs do not vary in relation to production. In practice, this equivalence does not always hold, and depending on the period under consideration by management, some overhead expenses (such as sales, general and administrative expenses) can be adjusted by management, and the specific allocation of each expense to each category will be decided under cost accounting.
In business planning and management accounting, usage of the terms fixed costs, variable costs and others will often differ from usage in economics, and may depend on the intended use. For example, costs may be segregated into per unit costs (costs of goods sold), fixed costs per period, and variable costs as a proportion of revenue. Capital expenditures will usually be allocated separately, and depending on the purpose, a portion may be regularly allocated to expenses as depreciation and amortization and seen as a fixed cost per period, or the entire amount may be considered upfront fixed costs.

Semi variable cost is an expense which contains both a fixed cost component and a variable cost component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is payable proportionate to the level of activity.
It shows similarities to telephone bills. One must pay line rental and on top of that a price that depends on how heavy one is using the service. So it changes with output. Another example is satellite television. A price for the box must be paid monthly and to get additional movies, more money has to be given.
Cost of energy, such as electricity, is a good example as it is integral to production of goods and services. This component straddles both the fixed and variable universe because electrical power is essential for the basic operation of the business in lighting and heating - this portion is a sunk cost that is foregone regardless of production. As demand ramps up, more energy is required to ramp up the production process in the use of machinery or large banks of computers for instance. Cost of electrical energy will then rise accordingly as production activities increase. Therefore, the cost electricity can be viewed as semi variable.
Another example is salaried employees who are also compensated by commissions. This group is paid on a fixed salary plus they are also rewarded based on the volume of sales they can generate, or, other forms of quantitative measures based on revenues to the firm.

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In economics, and cost accounting, total cost (or total costs) describes the total economic cost of production and is made up of variable costs, which vary according to quantity produced such as raw materials, plus fixed costs, which are independent of quantity produced such as expenses for assets like buildings.
The rate at which total cost changes as the amount produced changes is called marginal cost; this is the marginal unit variable cost. If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis, then total cost is linear in volume, and given by TC = FC + unit VC * N.