A variable cost changes with the quantity of output or the level of activity. Raw materials, production labour-hours, packaging, and the electricity to run machines all scale with how many units the business produces. Make twice as many widgets, pay roughly twice as much for materials.
Variable costs contrast with fixed costs — costs that don’t depend on output (insurance, leases, salaries of permanent admin staff). The split is the basis of break-even analysis: total cost is , where the variable part usually grows roughly linearly with output , so for some per-unit variable cost .
The per-unit form is what you compare to the selling price per unit. The gap — selling price minus per-unit variable cost — is the contribution margin: how much each additional unit contributes toward covering fixed costs and then to profit.
In practice, “linear in ” is a useful approximation that breaks at extremes. Buying materials in larger lots usually unlocks bulk discounts, so has a slightly concave shape. Past full capacity, overtime wages and rushed-shipping fees make it slightly convex. For modelling and break-even calculations the linear approximation is almost always fine.
See Fixed cost, Incremental cost, and Total cost for related cost-structure concepts.