In the economy, variable proportional costs (VPC) are costs whose amount is proportional to the volume of production. In other words, the more we produce, the more variable costs we incur.
What are variable proportional costs? Definition of the term
Proportional variable costs are the kind of costs that change as the volume of production changes. The value of these costs depends on the volume of production, but is not directly proportional to it. Why is this the case? This is because proportional variable costs include such elements as materials, raw materials, energy, as well as employee wages. All these factors have a price, which can change with changes in the market. Therefore, proportional variable costs can be higher or lower depending on the market situation. Keep in mind that proportional variable costs are only one type of costs that can be found in an enterprise. There are also fixed costs, sunk costs, direct costs, among others.
What is included in variable proportional costs?
Proportional variable costs are all costs that change proportionally to the level of production. These are mainly raw material and material costs, energy costs and labor costs. The level of production has a direct impact on proportional variable costs. The more a product is produced, the more raw materials and materials are needed, as well as more energy and labor. All of these factors affect proportional variable costs. Proportional variable costs are important for companies because they affect the profitability of production. The more a product is produced, the higher the proportional variable costs. To maintain profitability, companies need to constantly monitor and regulate proportional variable costs.
Proportional variable costs – examples
Proportional variable costs are costs that change as the volume of production increases or decreases. Examples of variable proportional costs are the cost of raw materials and supplies, the cost of energy, the cost of variable labor. Proportional variable costs are important for enterprises because they can help optimize production costs. Enterprises can control variable proportional costs by managing the volume of production. For example, a company can reduce variable proportional costs by reducing production volume. Another way is to increase labor productivity, which can help reduce proportional variable costs.
