What are variable costs?

Definition

Variable costs are the bills that grow when you sell more and shrink when you sell less. On the books, they are expenses that move with each extra unit, ticket, or hour sold.

A food truck spends more on tortillas, oil, and wrapping paper on a packed Saturday than on a slow Tuesday. Those kitchen dollars are this kind of cost because the day's tickets set the amount.

Accrual books record the cost when the plates go out, even if the grocer has not been paid. Cash-basis books wait until cash leaves the operating bank account.

These costs follow the sale. They are not the truck payment or the commissary rent, which stay put either day.

Where it shows up

P&L: Located in cost of goods sold and other lines that move with each sale.

Balance Sheet: Related to inventory leaving as volume rises.

Cash flow: Decreases in inventory, reported cash from operating activities increases.

See also: Fixed Costs · Contribution Margin · Cost Of Goods Sold

When you look at your Income Statement, these costs often sit in cost of goods sold. Card fees, wrapping, and hourly window help can sit nearby if they move with each ticket.

A high food line in a busy week is expected. A high food line in a quiet week usually means waste, theft, or a recipe that no longer matches the price.

The Balance Sheet does not print a standing variable-cost total. Related amounts show up as inventory leaving current assets when the truck sells more plates.

On the Statement of Cash Flows, buying the food is one cash event and selling the plates is another. When inventory falls because the food was sold, reported cash from operating activities rises.

Accounts payable may still hold the grocer's bill after the tortillas are gone. The cost already hit the Income Statement; the unpaid bill is what remains.

How it works

The truck sets a recipe and a price for each plate. Every extra plate then pulls another scoop of filling, another tortilla, and another sheet of foil.

As revenue rises, those kitchen dollars rise with it. As tickets fall, the kitchen should buy and use less.

Direct materials are the usual starting point. Meat, tortillas, salsa, and oil can be traced to the plates that went out the window.

Some selling costs move the same way. A card processor that charges a percent of each swipe, or a wrapper used on every order, belongs with this group.

Stay with the bills that flex with tickets. The truck loan and the commissary stall do not, so they are a different kind of cost.

The books move inventory to cost of goods sold when the plate is sold, not when the crate is received. Until then the food is still an asset on the shelf in the truck.

Keep the recipe card, the packing list, and the day's ticket count with the close. Anyone tying food cost to sales should see how many plates the truck actually served.

Example

Mile Marker Tacos is a food truck that sells one plate for $12. Food, foil, and sauce cost $4 each time a plate goes out.

On a slow Tuesday the truck sells 80 plates. Variable kitchen cost is 80 times $4, or $320.

On a packed Saturday the truck sells 200 plates. Variable kitchen cost is 200 times $4, or $800.

The truck payment is $1,400 either day. That bill does not move with the tickets, so it is not part of this group.

If Saturday also runs 2.5% card fees on $2,400 of sales, that is another $60 that moved with the swipes. The fee is variable even though it never sat in the cooler.

The Income Statement for Saturday shows $2,400 of sales and $800 of food cost, plus the $60 of card fees. Tuesday shows $960 of sales and $320 of food cost.

Mile Marker does not post a line that says "variable costs." The books post cost of goods sold and card fees, and those lines happen to move with the window.

Common mix-ups

Variable costs are not the same thing as cost of goods sold as a whole. Some shops put only food there; others mix in kitchen wages that do not move one-for-one with plates.

Variable costs are not the same thing as a large grocery run. Buying a crate raises inventory; the cost becomes variable when the food is used or sold.

Variable costs are not the opposite of unpaid bills. A cost can move with sales and still sit in accounts payable until the grocer is paid.

Related terms

• Fixed Costs: Costs that stay roughly the same regardless of sales volume.
• Contribution Margin: Revenue minus variable costs, showing what is left to cover fixed costs.
• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Semi-Variable Costs: Costs with a fixed base plus a usage-driven portion.
• Merchant Processing Fees: The percentage and per-transaction fees charged to accept card payments.
• Direct Materials: Materials that can be traced directly to a finished product.
• Operating Leverage: How much profit swings when revenue moves, given the mix of fixed and variable costs.