How to Calculate Variable Costs
Classify your costs as either fixed or variable., Add together all of the variable costs for a given period., Divide the total variable costs by the production volume.
Step-by-Step Guide
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Step 1: Classify your costs as either fixed or variable.
Fixed costs are those that will remain constant even when production volume changes.
Rent and administrative salaries are examples of fixed costs.
Whether you produce 1 unit or 10,000, these costs will be about the same each month.
Variable costs vary with production volume.
For example, raw materials, packaging and shipping, and workers' wages are all variable costs.
The more units you produce, the higher these costs will be.Once you understand the difference between fixed and variable costs, classify each of your business's costs.
Many costs, such as the examples mentioned above, will be easy to classify.
Others may be more ambiguous.
Some costs can be difficult to classify, not behaving in a strict fixed or variable pattern.
For example, an employee may be paid a fixed salary in addition to a commission that varies with sales volume.
These costs are best broken up into separate fixed and variable elements.
In this case, only the employee's commission would be treated as a variable cost. -
Step 2: Add together all of the variable costs for a given period.
After classifying all your variable costs, total them for a given time period.
For instance, consider a simple manufacturing operation that has only 3 variable costs: raw materials, packaging and shipping, and workers' wages.
The sum is your total variable cost.Imagine the costs incurred for the most recent year are as follows: $35,000 of raw materials, $20,000 of packaging and shipping, and $100,000 in employee wages.
The total variable costs for the year are therefore 35,000+20,000+100,000{\displaystyle 35,000+20,000+100,000}, or $155,000{\displaystyle \$155,000}.
These costs are directly related to the production volume for that year. , Dividing the total variable costs for a given time period by that period's production volume will yield the unit variable cost.
Specifically, unit variable cost can be calculated as v=VQ{\displaystyle v={\frac {V}{Q}}}, where v is unit variable cost, V is total variable cost, and Q is the quantity produced.
For example, if the business above produced 500,000 units of its product that year, its unit variable cost is $155,000500,000{\displaystyle {\frac {\$155,000}{500,000}}} or $0.31{\displaystyle \$0.31}.
The unit variable cost is simply the variable cost per unit produced.
It is the extra cost incurred by producing each additional unit.
For example, if the business above produced 100 more units, it would expect to incur additional production costs of $31. -
Step 3: Divide the total variable costs by the production volume.
Detailed Guide
Fixed costs are those that will remain constant even when production volume changes.
Rent and administrative salaries are examples of fixed costs.
Whether you produce 1 unit or 10,000, these costs will be about the same each month.
Variable costs vary with production volume.
For example, raw materials, packaging and shipping, and workers' wages are all variable costs.
The more units you produce, the higher these costs will be.Once you understand the difference between fixed and variable costs, classify each of your business's costs.
Many costs, such as the examples mentioned above, will be easy to classify.
Others may be more ambiguous.
Some costs can be difficult to classify, not behaving in a strict fixed or variable pattern.
For example, an employee may be paid a fixed salary in addition to a commission that varies with sales volume.
These costs are best broken up into separate fixed and variable elements.
In this case, only the employee's commission would be treated as a variable cost.
After classifying all your variable costs, total them for a given time period.
For instance, consider a simple manufacturing operation that has only 3 variable costs: raw materials, packaging and shipping, and workers' wages.
The sum is your total variable cost.Imagine the costs incurred for the most recent year are as follows: $35,000 of raw materials, $20,000 of packaging and shipping, and $100,000 in employee wages.
The total variable costs for the year are therefore 35,000+20,000+100,000{\displaystyle 35,000+20,000+100,000}, or $155,000{\displaystyle \$155,000}.
These costs are directly related to the production volume for that year. , Dividing the total variable costs for a given time period by that period's production volume will yield the unit variable cost.
Specifically, unit variable cost can be calculated as v=VQ{\displaystyle v={\frac {V}{Q}}}, where v is unit variable cost, V is total variable cost, and Q is the quantity produced.
For example, if the business above produced 500,000 units of its product that year, its unit variable cost is $155,000500,000{\displaystyle {\frac {\$155,000}{500,000}}} or $0.31{\displaystyle \$0.31}.
The unit variable cost is simply the variable cost per unit produced.
It is the extra cost incurred by producing each additional unit.
For example, if the business above produced 100 more units, it would expect to incur additional production costs of $31.
About the Author
Jerry Ramirez
A seasoned expert in government, Jerry Ramirez combines 3 years of experience with a passion for teaching. Jerry's guides are known for their clarity and practical value.
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