According to abbreviationfinder, VC stands for Variable Cost. Cost is the economic outlay that must be made to acquire or maintain a product or service. Variable, on the other hand, is that which varies: that changes or that is not stable.
The idea of variable cost, therefore, refers to the cost that experiences variations when the volume of production is modified. As the level of activity increases, variable costs also increase. Similarly, if production is reduced, variable costs fall.
Let’s see some concepts that are related to the variable cost, and that are necessary to understand it in all its depth. We can start from the following statement: the variable cost goes through changes as the volume of production varies. Production volume or activity level is understood as the degree to which production capacity is used.
For its part, the production capacity (or productive capacity) is the maximum level that a given structure can reach in its activity. This concept is essential to manage any company, since it leads to the analysis of the degree of use that each resource receives and, therefore, to its optimization.
Returning to the volume of production, it is usually measured as a percentage, that is, of the one that uses the production capacity. On the other hand, it is also possible to appeal to absolute magnitudes, such as hours of service consumed, units manufactured, number of services provided, etc.
All this shows us that according to the percentage of use that we give to the resources of a company, the variable cost will be modified. Except for cases in which a change in structure takes place, in economic units, the trend of variable costs is usually linear; for this reason, they have an average value per unit that is generally constant.
When the cost is not linked to the level of activity, it is called a fixed cost. In this case, whether the level of activity is increased or decreased does not affect the cost, since it does not depend on it. Although it may seem easy to understand the differences between variable and fixed costs, it is not a mere distinction between two concepts, but an essential aspect to take into account when making the most important decisions in a business.
Take the case of a pizzeria. To produce a large mozzarella pizza, you need to spend 10 pesos on raw materials (including flour, tomato sauce, mozzarella cheese, and other ingredients). If the pizzeria decides to produce one hundred mozzarella pizzas per night, it will cost 1,000 pesos in raw materials. But if the increase in demand leads to the need to produce one hundred and fifty pizzas, the cost of raw materials will rise to 1,500 pesos. It can be stated, in this way, that the raw materials constitute a variable cost for the pizzeria.
That same pizzeria pays 17,000 pesos a month for the rent of the space where it operates. It doesn’t matter if you produce 50, 100, 200 or 1000 pizzas every night: the rental price will remain the same. Rent, then, is not a variable cost: it is a fixed cost.
According to the theory of microeconomics, variable costs usually fall into the non-linear group, and a first stage of increasing returns is observed, which is followed by a decreasing one. Microeconomics belongs to the economy, and focuses on the study of how individual agents behave, such as companies, employees, investors and consumers, as well as the markets themselves.