The difference between variable and fixed costs is that fixed costs stay the same no matter how your production output changes. To help you better understand variable costs, let’s look at how it differs from other costs you may deal with. Understanding your variable costs can help benefit your business, from helping you determine your pricing to make informed decisions that can help increase your profitability. Credit card fees on purchases made by customers. Some common examples of variable costs in a business include: Variable costs can be direct or indirect costs, meaning they can be directly related to the product itself or more generalized to the production process. While this may seem fairly straightforward, it can become confusing when dealing with them in real time. On the other hand, the lower your production output, the lower your variable costs will be. The higher your production output, the higher your variable costs will be for that period. Depending on your company's output, variable costs may be higher or lower than before. The variable cost per unit of plastic balls is $5, and the company manufactures 15,000 boxes.Variable costs are expenses that change from month to month based on production. The variable cost per unit of plastic boxes is the company manufactures $8 and 10,000 boxes. Average Variable Cost Formula ExampleĪ company manufactures plastic boxes and plastic balls. It helps to determine the average cost of production of a single unit of product in a company irrespective of the type of product. The sum of all product’s total variable costs divided by the total number of units produced by different products determines the average variable cost. So, the variable cost per unit of soap is $13, and the total variable cost of soap is $65,000. Total Variable Cost = Quantity * Variable Cost Per Unit Variable Cost Per Unit = Labor Cost Per Unit + Direct Material Per Unit + Direct Overhead per Unit Now we will calculate the cost of soap per unit.Ĭalculation for Variable Cost Per Unit is: The total Production done by the company in one month is 5,000. The cost of raw material per unit is $5, the labor cost of production per unit is $7, the fixed cost for a month is $500, the overhead cost per unit is $1, and the salary for office and sales staff is $3,000. Let’s see an example to understand Variable cost per unit better.Ī company named Nile Pvt. The production of one unit requires an additional cost called direct overhead, which varies depending on the production quantity.We can say that it is directly proportional to the variable cost. Direct material is the raw material cost per unit, as it depends on the production quantity.Labor cost is taken as labor cost per unit, depending on the production quantity.It comprises labor cost per unit, direct material per unit, and direct overhead per unit. The variable cost per unit is said to depend on the production quantity. Variable cost per unit is the cost of one production unit, but it includes only variable cost, not fixed one. Total Variable Cost = Quantity of Output * Variable cost per unit of output Variable Cost Per Unit Formula The total variable cost is variable since it depends on the quantity of the product. The production quantity determines the variable cost, which, in turn, determines the total variable cost of a product. The total cost comprises the sum of the fixed cost and the variable cost.Ĭalculating total variable cost involves multiplying the quantity of output by the variable cost per output unit.
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