Forecasting is only as good as the numbers behind it. And variable expenses are often misunderstood.
These are costs that rise or fall with business activity, like:
- Raw materials
- Packaging
- Shipping and transport
- Sales bonuses and commissions
- Energy and utilities
Read more: A Complete Guide to Financial Statement Analysis for Strategy Makers
They may look simple, but many teams handle them poorly. This causes problems, especially in industries like manufacturing, retail, or distribution, where teams manage lots of cost drivers across different markets.
In this article, you’ll learn:
- What counts as a variable expense (with clear examples)
- Why many teams plan them incorrectly
- How to plan them better using volume-based drivers
What Counts as a Variable Expense
Variable expenses change with activity, like how much you produce or sell. Unlike fixed costs like rent or salaries, these go up or down depending on output.
Here are some industry examples:
- Manufacturing (Automotive, Food & Beverage): Raw materials, packaging, and electricity usage tied to production runs. For example, a regional food processor may see packaging and energy costs spike during seasonal production peaks.
- Pharmaceutical Distribution: Transport and warehousing costs that vary with order volume and delivery routes. When order sizes or customer locations shift, so does the freight cost structure.
- Retail Chains: Staff bonuses, promotional discounts, and payment processing fees that depend on monthly sales figures.
- Logistics and Distribution: Fuel, tolls, and third-party transport expenses that rise with kilometers driven or tonnage delivered.
These costs can be planned well, but only if you know what drives them. When teams manage them properly, they don’t guess. Instead, they build models based on real activity. As a result, they improve both accuracy and flexibility.
Therefore, taking the time to define cost drivers is a smart first step in improving planning models.
Why Variable Expenses Are Often Mismanaged
Most teams don’t ignore variable expenses on purpose. However, problems usually start with how they build models. When the goal is speed, variable costs often get treated like fixed ones.
This might be fine in small or stable companies. But in bigger, more complex ones, it leads to mistakes.
Here’s what usually goes wrong:
- Old assumptions: Costs are copied from last year or based on simple percentages
- No drivers: Models don’t link costs to actual numbers like units made or orders shipped
- Missing data: Finance doesn’t use input from teams like sales, production, or logistics
- Excel limits: Spreadsheets make it hard to scale or spot mistakes
Because of this, forecasts look okay on the surface but fall apart when plans change. Then finance scrambles to explain gaps and fix errors.
As a result, these recurring issues can lead to reduced confidence in the forecast process across the organization.
How to Plan Variable Expenses More Accurately
You can improve forecasts by linking variable expenses to what actually causes them.
Here’s how:
Step 1: Define the cost drivers
First, figure out what causes the cost:
- Packaging is driven by units produced
- Freight depends on distance or volume
- Commissions are based on revenue by product or region
Tie each cost to a simple number. This way, your forecast adjusts on its own.
Step 2: Use volume-based formulas
Next, don’t guess or use averages. Instead, use real formulas:
- units_sold × cost_per_unit
- km_driven × cost_per_km
Now, when sales or production changes, your cost plan updates right away. Therefore, you spend less time updating and more time analyzing.
Step 3: Split mixed costs
Some costs have both fixed and variable parts. Take utilities or service contracts, you might pay a base fee plus extra based on usage. Break these into two parts: keep the fixed portion separate, and let only the variable part respond to changes in activity. This gives you a clearer view of how costs really behave as business levels shift.
Step 4: Work with other teams
Don’t plan in isolation. Sales, production, and operations often know what’s coming, demand changes, production shifts, or seasonal trends. Use their input to build a more accurate cost plan. It also helps reduce back-and-forth later when budgets are reviewed or challenged.
Fixed vs. Variable: Why It Matters
Mixing fixed and variable costs is a common mistake. As a result, many plans miss important changes in business activity.
- Fixed costs (like rent or salaries) stay the same.
- Variable costs go up or down with business activity.
- Semi-variable costs (like energy or cleaning) have both parts.
If your model treats everything the same, it won’t adjust when things change. For example, if sales drop 10%, some costs should drop too. If they don’t, your plan is wrong.
Keeping things separate helps you:
- Show how costs change with revenue
- Test different scenarios
- Improve your EBITDA forecast by linking costs to activity
This matters most in fast-moving industries with cost swings, like food, retail, or production. Therefore, clarity here supports faster and more confident decisions.
Read: Revenue vs EBITDA: Which Metric Should Drive Your Strategic Planning
Tools That Make Variable Costs Easier to Plan
Even with the right logic, you need the right tools to make it work. Otherwise, all that effort goes to waste.
Many teams still use Excel. It works for simple setups, but it struggles with big plans and lots of people.
Here’s why spreadsheets fall short:
- Hard to link costs to drivers
- Manual work for each scenario
- Errors go unnoticed
- Collaboration is slow and messy
On the other hand, modern planning tools, like Farseer, solve these issues. They:
- Help you build cost models that update on their own
- Link cost drivers to actual plans in real time
- Let you test scenarios without rebuilding the model
- Keep all data in one place so teams stay aligned
Thanks to better tools, finance can save time, cut errors, and build stronger plans. Moreover, they free up time for higher-value work.
Get Variable Expenses Right, the Rest Will Follow
You don’t need to start from scratch. Just fix how you handle variable costs.
When costs follow real activity, forecasts get better. As a result, planning gets faster. Teams stop reacting and start acting.
If your plan still treats variable costs as fixed, it’s time to change that. Even small steps, like using the right drivers, can improve results fast.
Excel may have worked in the past. However, if you want to scale this across teams, you’ll need tools that can keep up. In the end, planning becomes faster, more accurate, and far more useful to the entire business.
Đurđica Polimac is a former marketer turned product manager, passionate about building impactful SaaS products and fostering connections through compelling content
FAQ
Variable expenses are costs that change with business activity, such as production volume or sales. Common examples include raw materials, packaging, shipping, sales commissions, energy usage, and transport costs.
Many teams rely on last year’s numbers, flat percentages, or spreadsheets that don’t link costs to real activity. This leads to forecasts that break down when volumes, demand, or operations change.
Variable expenses should be linked to clear cost drivers using volume-based formulas, such as units sold × cost per unit or kilometers driven × cost per kilometer. This allows costs to adjust automatically when plans change.
Mixed costs should be split into fixed and variable components. The fixed portion stays constant, while the variable portion is linked to usage or activity, giving a more realistic view of cost behavior.
Modern FP&A tools like Farseer allow teams to link costs to drivers, run scenarios easily, and keep all planning logic in one shared model—reducing errors and improving forecast accuracy.
