Variable overhead, sometimes referred to as indirect costs, are expenses a business incurs over and above the production costs related to a specific product or service. These overhead costs occur on a day-to-day basis and typically do not change with the production rate of each product or service. Variable overhead can include costs such as labor, raw materials, utilities, sales commissions, indirect materials and other related expenses. Variable overhead costs are important to track and monitor because they can affect the profitability of a company in both the short term and the long term.

In contrast to fixed overhead costs, which are the same regardless of the level of business or production activity, variable overhead costs grow or shrink in direct proportion to the amount of production activity. Without accurate tracking of these costs, it can be difficult to accurately predict the profitability of a firm. As production output increases or decreases, variable overhead moves in tandem. Examples of variable overhead costs include production supplies, energy costs to run production lines, and wages for those handling and shipping the product. It is important to note that these costs are dependent on the level of production; thus, they can vary greatly from one business to another.

Tracking and monitoring the impact of variable overhead costs on a firm’s bottom-line is essential to long-term success in competitive markets. For example, if a company’s production output increases, but its variable overhead costs are not monitored and adjusted accordingly, the business may end up losing profit despite its greater production. Additionally, keeping a close eye on variable overhead costs allows businesses to identify where they may need to reduce expenses or shift resources in order to maximize their profits.

Overall, variable overhead are the costs of operating a firm that fluctuate with the level of business or manufacturing activity. In order to maximize a company’s profits and stay competitive in the marketplace, variable overhead must be tracked and monitored closely, so that firms can account for changes in production levels and expenses. Ultimately, this is the key to achieving long-term profitability and sustainability.