Variable cost and marginal cost are two of the most common types of costs encountered in financial and accounting computations, as well as in general bookkeeping. Other related terms are the fixed and the total cost. All these are interrelated, and understanding any one of them requires knowing about the other various types as well.
The total cost is simply the amount of money required to keep a business running. Usually it is taken as the total cost of production or operation, or the total incurred from producing any number of goods or products. The total cost is calculated as fixed cost plus variable cost. The fixed cost is the constant, unchanging portion of the total cost. It remains constant regardless of the amount of production going on. Whether the business produces only one product, or a thousand products, or even no products at all, the fixed cost remains exactly that — fixed. Often, the fixed cost includes costs for overhead, utilities, rent, and interest on loans.
The variable cost (VC) is a changeable amount that varies according to the level of production. If the company produces more, then it will have a larger variable cost. If it produces less, then it will have a lower amount. There is added variable cost when the company incurs additional expenses from spending funds on more equipment, manpower, supplies, and raw materials and so on, to increase its output production.
The marginal cost (MC) is the amount required to increase productions by one unit. This means that the MC is how much of an increase will result by manufacturing or producing one more of the same item or service. For example, with a company that makes ten cars within a given time period, the marginal cost is the amount needed to enable it to produce eleven cars within the same amount of time.
The variable cost and marginal cost are directly related. The variable cost is actually the sum of all marginal costs. Add all marginal costs and the result is the variable cost. This is because the marginal cost is actually a single-unit variable cost, or the variable cost that is incurred when increasing the output production by one unit.
The variable cost and marginal cost are not as easy to determine as the fixed cost. They are influenced by many factors, such as fluctuations in the prices of raw materials and services. Their very nature dictates that the variable cost and marginal cost at one point in time will not be the same as those at another point in time. As everyone knows, all costs tend to increase in difficult economic times, and in accordance to the law of supply and demand.