Variable Cost Ratio

AAA

DEFINITION of 'Variable Cost Ratio'

Variable costs expressed as a percentage of sales. The variable cost ratio compares costs, which fluctuate depending on production levels, to the revenues made on those products. This ratio relates the specific costs to the revenues they generate.

May also be defined as "1 - contribution margin ratio".

INVESTOPEDIA EXPLAINS 'Variable Cost Ratio'

The variable cost ratio is useful in setting pricing policy so as to arrive at the optimum price for a product. The calculation can be done on a per-unit produced basis, or by totals over a time period as long as the numerator and denominator are used.

For example, if variable costs per unit of a product are $55 and the product sells for $100, the variable cost ratio is 55%. The difference between the selling price and variable costs is known as contribution margin (CM); this amount is the contribution toward meeting fixed costs. The variable cost ratio can also be computed as (1 - CM ratio).

RELATED TERMS
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  2. Variable Cost

    A corporate expense that varies with production output. Variable ...
  3. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  4. Contribution Margin

    A cost accounting concept that allows a company to determine ...
  5. Operating Cost

    Expenses associated with administering a business on a day to ...
  6. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
RELATED FAQS
  1. What are the risks of having both high operating leverage and high financial leverage?

    In finance, the term leverage arises often. Both investors and companies employ leverage to generate greater returns on their ... Read Full Answer >>
  2. Why is the use of contra accounts so important for maintaining ledgers?

    Contra accounts have been used in financial accounting to verify the balance of another corresponding account since Renaissance ... Read Full Answer >>
  3. What is price-to-book ratio is typical in the electronics sector?

    In fundamental analysis, book value is an important concept for measuring a business's value. Book value equals total assets ... Read Full Answer >>
  4. What price-to-earnings ratio is average in the real estate sector?

    The price-to-earnings (P/E) ratio is a commonly cited valuation metric that can help investors decide what stock price is ... Read Full Answer >>
  5. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  6. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  2. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  3. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  4. Economics

    Understanding the Accounting Cycle

    An accounting cycle consists of the traditional procedures performed to record business events and transactions in a company’s accounting records.
  5. Fundamental Analysis

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  6. Fundamental Analysis

    Online Gaming Industry Stocks

    A look at some of the top stocks in the online gaming industry.
  7. Fundamental Analysis

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  8. Stock Analysis

    Invest In Cyber Security With These Stocks

    Learn about some amazing cyber security plays in this hot sector.
  9. Fundamental Analysis

    Tesla Home Batteries Could Transform Your Electric Bill

    With limited daylight hours, solar power cannot power our homes at night, but Tesla Motors might help solve that problem.
  10. Fundamental Analysis

    Understanding Lululemon's Business Model

    Lululemon has succeeded in marketing more than just fitness apparel. The company has strategies for continued growth, but it faces tough competition.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center