What it means in practice
Materials, packaging and some transaction fees may vary with each sale. The relationship is not always perfectly proportional: volume discounts, overtime and delivery thresholds can change the cost per unit. State the activity unit and relevant range. Avoid assuming that a cost is variable merely because its monthly amount changes. The purpose is to understand how the cost responds to the decision being examined. Check whether the cost changes with units delivered, revenue collected or another activity. A payment processing fee may follow revenue, while packaging follows units. Some costs contain both fixed and variable parts. State the basis used in the calculation and avoid classifying every expense as variable simply because it can change from one month to another.
A fictional worked example
A fictional order uses ₦2,000 of packaging and materials. Another identical order requires another ₦2,000 under the same assumptions.
A useful question
Which costs are caused by the additional sale you are considering?
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