Variable Costs

Variable costs are those that are linked to the supply of goods, so if a product or service isn’t ordered (or produced or sold – depending upon the cost trigger), then the costs are not incurred. In financial statements they are termed Cost Of Goods Sold (COGS). 

Materials and components are obvious variable costs but be sure to include sales commissions (such as payment gateway %ages), freight if shipping, travel if delivering a service at a venue. We also recommend that cost of customer acquisition is included as a variable cost, separate from branding, website management and ‘generic’ market presence (which can be considered fixed costs).

Gross Profit is the measure of income less cost of goods. For a business with various service or product lines, it is good practice to calculate the gross profit for each line separately so that more profitable lines don’t obscure issues with other ones that need some cost or pricing attention.