Common Variable Cost Categories in Bookkeeping

As a business owner, you’ve likely heard the term variable costs thrown around in conversations about bookkeeping and accounting. What are they, though, and why should you care? Knowing about variable costs is a big help when it comes to keeping your business's finances in order, controlling costs, and making more money. We will deconstruct the most prevalent types of variable costs in accounting, address your urgent queries, and provide practical advice to empower you—all in a manner that business owners like you can comprehend and implement.

What Are Variable Costs and Why Do They Matter?

Costs can be broken down into two main groups: fixed costs (like rent or pay) and variable costs. Costs that change based on how much your business makes or sells are called variable costs. When you make or sell more, these costs go up. When you do less, they go down. They're like the beating heart of your business—always busy.

Why do they matter? Because keeping track of changeable costs helps you keep your profit margins safe and gives you a clear picture of your other business costs. You can't see if you miss them. If you get them right, you'll be able to plan your money better. So, what kinds of things do you often see in your books? Let's look around.

Common Variable Cost Categories in Bookkeeping

If you're looking for variable prices, here are some of the most common ones. Each one is directly related to how busy your business is, and you need to understand them all to get good at keeping your books.

1. Raw Materials and Supplies

Raw materials are very important if you make things, like jewelry or fancy cupcakes. You need more flour, beads, or cloth the more you make. These costs change based on how much you make.

Example: A bakery spends $200 on flour for 100 cakes but $400 for 200 cakes.

Tip: Negotiate bulk discounts with suppliers to keep these variable costs in check.

2. Direct Labor

This is the pay for people who are directly involved in making things, like people who work on an assembly line or freelance designers who get paid by the job. Costs will go up if you need to hire more people because of a rise in sales.

Question: “Does overtime count as a variable cost?” Yes! Overtime pay scales with production demands, unlike fixed salaries.

Tip: Track hours meticulously in your business bookkeeping to spot trends and plan staffing.

3. Shipping and Freight

Do you sell things online or ship them? You will spend more on postage, packaging, and shipping services as you fill more orders. These are the usual types of changeable costs.

Example: Shipping 50 packages might cost $250, but 100 packages could hit $500.

Tip: Compare carriers regularly—small savings per shipment add up fast.

4. Sales Commissions

This cost goes up with each sale if your team gets paid fees. It will motivate your sellers, but if you don't keep an eye on it, it could cut into your profits.

Question: “Are commissions always variable?” Usually, yes—unless you pay a flat rate regardless of sales, which is rare.

Tip: Set commission caps to balance motivation and cost management.

5. Utilities (Sometimes)

Things like water and power can be tricky. They are changeable costs because they go up when production goes up, like when machines are run for longer. They're set if they don't change, like office lights.

Example: A factory’s power bill doubles during a busy season.

Tip: Use energy-efficient equipment to tame these costs.

6. Advertising and Marketing

A lot of the time, pay-per-click ads and holiday campaigns change based on your sales goals. People may buy more from you if you spend more, but it comes with a price.

Tip: Track ROI on every campaign to ensure it’s worth the business expense.

How Do Variable Costs Differ from Fixed Costs?

How do I tell the difference between variable and fixed costs?" is a question I get asked a lot. It's easy: Some costs, like rent or insurance, don't change no matter how much you make. Costs that change depending on how much you do change. If you mix them up in your business books, they can disrupt your financial plans and leave you perplexed when profit margins fail to add up.

Quick Test: Ask, “Does this cost change if I sell more?” If yes, it’s variable. If no, it’s fixed.

Example: Your lease is $1,000 monthly (fixed), but packaging costs rise from $50 to $150 as orders triple (variable).

Common Mistakes Business Owners Make with Variable Costs

Even seasoned entrepreneurs trip up here. Let’s look at some pitfalls and how to dodge them:

Ignoring Small Costs: A $5 shipping fee here or a $10 supply there may not seem like a big deal at first, but it adds up over time. Keep track of every dollar.

Guessing Instead of Following: It's a bad idea to try to guess variable costs without having any facts. To be sure of your numbers, use accounting tools or spreadsheets.

Overlooking Trends: If raw material costs jump 20% yearly, but you don’t adjust pricing, your profit margins shrink.

Review your variable prices each month. Find trends, make spending changes, and stay ahead of the game.

Practical Tips to Manage Variable Costs 

Ready to take charge? Here are some bookkeeping tips to keep your variable costs under control and your business thriving:

Use technology. Tools like FreshBooks and QuickBooks automatically sort business costs into the right categories, which saves you time and trouble.

Smart Predictions: To guess what the future fluctuating costs will be, look at past sales. Get ready for a busy time of year? Set aside extra money for materials and work.

Talk with vendors about prices: A 10% discount on goods can help you make more money without you having to do anything extra.

Read Over and Over: Pick a time every month to look at your changeable costs. You can turn quickly if you catch a spike early.

How Variable Costs Impact Your Bottom Line

The catch is that changing prices has a direct effect on your profit margins. They go up when you sell more, but so should your income. The key is to keep them in the right proportions. You're in trouble if your fluctuating costs rise faster than your income. That's when cost management and business accounting come together to save the day.

Example: You charge $20 for each shirt you sell. It costs $8 per shirt for materials and work. It costs you $1,200 to make 100, so you keep $1,200. When you double production, costs go up to $1,600, but sales go up to $4,000, which means you can make more money if you do it right.

Tip: To find out what's left for set costs and profit, subtract your variable costs from your sales to get your contribution margin. It's a quick check-up on your company.

Read More: How to identify variable costs in financial statements

Read More: Controlling Variable Expenses During Low Revenue Months

DIY Bookkeeping vs. Professional Help

You can handle unpredictable costs on your own if you have the right tools and are disciplined. Start with a simple spreadsheet. List things like materials, labor, and shipping, and then every week, write down your costs. It can be used with accounting tools to make tracking and making reports automatic. When your numbers line up, it makes you feel good.

running a business is hard. If keeping track of variable prices is too much for you, or if you'd rather focus on growth than numbers, you might want to think about outsourcing. That's where we come in. Here at Irvine Bookkeeping, we help small and medium-sized businesses just like yours make their accounting easier. We use top-notch software to keep track of your changeable costs, protect your profit margins, and keep your financial records clean. This saves you time and stress.