Variable cost is incurred on the employment of variable factors like raw materials, direct labour, power, fuel, transportation, sales commission, depreciation charges associated with wear and tear of assets, etc. It varies directly with output.
Cost of a factor is obtained by the product of number of physical units of the factor and its price. The variable cost is incurred only, when’ some amount of output is produced and it rises with the increase in the level of production and vice versa.
In other words, variable cost is incurred so long as production continues, but the moment production stops, variable cost also ceases. If a firm shuts down its business for some time, it has not to incur any expenditure on variable cost.
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However, the maximum quantity of the output that can be purchased depends upon the quantity of the fixed factors of production. Marshall calls the variable cost as prime cost. It is also called direct cost, since it varies directly with the change in the level of output. Total variable cost is graphically shown in Fig. 9.2.
Fig. 9.2: Total Fixed Cost, Total Variable Cost and Total Cost Curves
Total variable cost curve starts from the origin indicating that when output is zero, variable cost is nil. Further, the variable cost has a rising trend from left to right. Variable cost initially rises at decreasing rate, then, at increasing rate corresponding to the growth of total product (TP) at increasing rate and decreasing rate respectively. This is clear from the comparison of the shapes of TVC and TP curves.