How To Calculate Variable Cost? Guide, Examples and Extra Tips
In life, there are few things that stay in a stable status, including the costs of doing business. Expenses change due to the activities of your business, which are defined as variable costs. Simply put, variable costs are stick with the number of units being made, also known as unit-level costs. Whatever types of products that your business produces, it’s necessary for you, as an owner, to understand your variable costs and how they relate to the total cost of doing business.
That’s why we have this How To Calculate Variable Cost: Guide, Examples and Extra Tips article today, which will go elaborately through the definition of variable cost, the average variable cost as well as the formula to calculate it. Let’s dive in!
Table of contents
- What is the variable cost?
- Total variable cost and average variable cost
- How to calculate the variable cost?
- How important is the variable cost to business?
What is the variable cost?
Variable Cost Definition
Variable costs are considered to be the total amount of all labor and materials that are needed to manufacture a unit of your product. This sum of variable cost is equivalent to the variable cost per unit, magnified by the number of units produced. Then, your variable cost will be averagely calculated as your total variable cost, divided by the number of units produced.
The variable costs can vary because they can increase and decrease as you make more or less of your product. If you can sell many units, so you can earn more money; however, a part of this money will need to be charged for the manufacturing cost to produce more units. Because you would have to need to make more units to turn your product into a profit at the same time you sell it. For each unit, it will require a specific level of resources, a greater number of units to increase necessary variable costs to produce them.
Variable Cost Examples
Let’s take the kitchenware maker selling business as an example. First, if you have someone purchased 10 knife sets for a total of 300 dollars, meanwhile, there are 100 dollars in the revenue budget that sent to craft the next 10 knife sets. So, when a business sells 30 knife sets for 900 dollars, which means that it has to pay 300 dollars of this revenue to make the next 30. On the whole, the kitchenware maker’s net revenue only increased by 100 dollars, while its variable costs increased by 300.
Total variable cost and average variable cost
A company’s total variable cost is defined as the expenses that vary in relation to the sum production during a given period. These costs are designed to connect to a business’ volume of production directly. They may fall up or down, relying on the amount of money that a company spends to produce. You can calculate the total variable cost by multiplying the cost to make one unit of your product by the number of products you’ve developed. For example, if it costs 70 dollars to make one unit of your product, and you’ve made 10 units, your total variable cost is 70 x 10, which is 700 dollars.
Meanwhile, the average variable cost is a different calculation that shows you the average cost to produce a single unit of a product by utilizing the total variable cost. The average variable cost is used for calculating the variable costs for each product that has varying costs per unit. To decide the average variable cost, you must know the variable cost of each unit being analyzed and then calculate the mean of them.
For instance, if you have 30 units of Product A at a variable cost of $20 for each unit, and 15 units of Product B at a variable cost of $50 for each unit, so there will be two different variable costs for you, which are $40 and $20. Additionally, you will have your average variable cost, which is (30 x $20 + 15 x $50) ÷ 45 , or $30 per unit.
How to calculate the variable cost?
For a specific period, you can utilize this formula to calculate the total variable cost for your company:
Total output quantity x variable cost of each output unit = total variable cost
To go more in details, to calculate your company’s total variable cost, you will have to follow the steps below:
- First, clarify all variable costs that are associated with the production of every unit for your product. Cost of labor, cost of materials, and variable overhead costs are the most common elements to be considered in variable costs.
- Secondly, you need to input all variable costs that are necessary to manufacture a unit together to obtain the total variable cost for one unit of your production.
- Next, you will have to multiply the variable costs for each unit of a product by the total number of units produced. The sum of this calculation will give you the total variable cost.
Here are some of the most well-known costs to consider for determining the variable costs of production:
- Production equipment, such as software
- Shipment fees
- Transaction costs
- Production materials
- Employee salaries
- Sales commissions
- Packaging fees
Let’s take a look at a real-life example of calculating total variable costs for the company’s production. There is a company that wants to regulate its total variable cost for producing 100 products. To calculate the total variable cost, of course, that company will have the figures for its variable cost per unit for each product manufacture first. For example, they will have to present:
- Direct material fees for each unit: 10 dollars
- Direct labor fees for each unit: 12 dollars
- Overhead fees for each unit: 14 dollars
The variable costs to produce one unit is $10 + $12 + $14 = $36, so company must spend 37 dollars to produce a product. After that, the total variable cost to produce 200 units of product for that company will be decided according to the following formula: 200 x 36 = 7200, which means the total variable cost required to manufacture 200 units is 3600 dollars.
How important is the variable cost to business?
So, what is the meaning of deciding the variable cost for business?
Firstly, it enables you to know the variable costs of your company, which might be fixed but play an important part in your manufacturing procedures. For instance, when your company has low funds, if you know what costs should be fixed or what costs should be paid, then it can help you a lot in preparation of your plan to deal with these costs. In addition to that, when you can be aware of the variable costs, then it will help you cut down on the costs that needed to be cut in your production.
Also, you might be convinced by some of variable cost’s additional reasons:
- It enables companies to define the input costs related to production that needs to be reduced.
- It offers a basis for deciding the profit projections of a business.
- It allows companies to determine their break-even analysis.
- It gives investors the ability to assess the way a company nails the varying operating conditions
- Further, variable costs can help you compare your business or a business you are considering investing in other companies that are in the same industry.
That wraps the How To Calculate Variable Cost: Guide, Examples, and Extra Tips article today to guide you about the Total Variable Cost and its related matters. I hope you can find some useful parts to apply to your real-life business.
If there is still something in your slide, please let us know. We are always pleased to help you. Also, don’t forget to visit our website Avada frequently as we will have more interesting and informative articles that help you with your business.