what is variable overhead 
variable overhead is a term used to describe the fluctuating manufacturing costs associated with operating businesses as production output increases or decreases variable overhead expenses move in kind variable overhead differs from the general overhead expenditures associated with administrative tasks and other functions that have fixed budgetary requirements holding a firm grasp on variable overhead is useful in helping businesses correctly set their future product prices in order to avoid overspending which can cannibalize profit margins understanding variable overhead costsfor companies to operate continuously they need to spend money on producing and selling their goods and services the overall operation costs managers sales staff marketing staff for the production facilities as well as the corporate office are known as overhead there are two types of overhead costs fixed and variable fixed overhead doesn t change with increases in levels of production examples include variable overhead as alluded to earlier fluctuates according to levels of production it may be tougher to pin down and keep within a budget the key difference between variable and fixed overhead costs is that if production stopped for a period there would be no variable overhead while fixed overhead remains variable overhead costsexamples of variable overhead include variable overhead costs can include pay for workers added when production is increased extra hours paid for production increases would be a variable cost costs of utilities for the equipment electric power gas and water tend to fluctuate depending on production output the rollout of new products manufacturing cycles for existing products and seasonal patterns additional factors that may be included in variable overhead expenses are materials and equipment maintenance variable overhead and pricingmanufacturers must include variable overhead expenses to calculate the total cost of production at current levels as well as the total overhead required to increase manufacturing output in the future the calculations are applied to determine the minimum price levels for products to ensure profitability a manufacturing facility s monthly expense for electricity for example will vary depending on production output if shifts were added to meet product demand the facility and equipment would undoubtedly use more electricity as a result the variable overhead expenses must be included in the calculation of the cost per unit to ensure accurate pricing although increasing production usually boosts variable overhead efficiencies can occur as output increases also price discounts on larger orders of raw materials due to the ramp up in production can lower the direct cost per unit a company that has production runs of 10 000 units and a cost per unit of 1 might see a decline in the direct cost to 75 cents if the manufacturing rate is increased to 30 000 units if the manufacturer maintains selling prices at the existing level the cost reduction of 25 cents per unit represents 2 500 in savings on each production run in this example as long as the total increase in indirect costs such as utilities and supplemental labor is less than 2 500 the company can maintain its prices increase sales and expand its profit margin example of variable overheadlet s say for example a mobile phone manufacturer has total variable overhead costs of 20 000 when producing 10 000 phones per month as a result the variable cost per unit would be 2 20 000 10 000 units let s say the company increases its sales of phones and in the following month the company must produce 15 000 phones at 2 per unit the total variable overhead costs increased to 30 000 for the month 