Total Variable Cost

Definition of Total Variable Cost

Total Variable Cost can be defined as sum total of all the variable costs that would change in the proportion to the output or the production of units and therefore helps in analyzing the overall costing and profitability of the company. It can be calculated as the multiplying the number of units produced with the Variable cost per unit.

Total Variable Cost Formula = Number of Units Produced x Variable Cost Per Unit
Total-Variable-Cost-Formula

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For eg:
Source: Total Variable Cost (wallstreetmojo.com)

Where,

Calculation of  Total Variable Cost (Step by Step)

Below are the steps required to calculate –

  1. Identify the labor hours required per unit.

  2. Identify the material that is associated with the product and compute the per-unit cost of it.

  3. We need to identify other variable overheads as well and consider the cost of it per unit.

  4. Add all of the above per unit cost, which would be the total variable cost per unit.

  5. Take out the number of units actually produced and not just sold.

  6. Now multiply the number of units produced by variable cost per unitVariable Cost Per UnitVariable cost per unit refers to the cost of production of each unit produced, which changes when the output volume or the activity level changes. These are not committed costs as they occur only if there is production in the company.read more.

Examples

You can download this Total Variable Cost Formula Excel Template here – Total Variable Cost Formula Excel Template

Example #1

A manufacturing unit that produces X as a product has the following variable cost per unit.

  • Direct Labor – $10.20
  • Direct Material – $11.13
  • Variable Overheads – $10.67

The total number of units produced was 1,000 units. You are to calculate the total variable cost of the product X.

Solution

Here we are given all the variable cost per unit, and therefore we can use the below formula to calculate the total variable cost per unit.

  • Direct Labor Per Unit: $10.20
  • Direct Material Cost Per Unit: $11.13
  • Variable Overhead Per Unit: $10.67

Therefore, the calculation will be as follows          

Total Variable Cost Formula Example 1.1png

=  1,000 x ( 10.20 + 11.13 + 10.67 )

= 1,000 x 32.00

Total Variable Cost Formula Example 1.2png

Example #2

Company HUL produces many different types of products and is a large company. It is one of the largest FMCG company in India. Recently it was hit by the competition in the market. Now it is considering repricing products to survive the competition. It first wants to compute what is the total cost of production of its three major products, which include Lux, Clinic Plus, and Fair and lovely. Below is the statement extracted from its latest stock statement, submitted to the bank.

ParticularsLuxClinic PlusFair & Lovely
No of Units Sold100000.0080000.00200000.00
Closing Inventory10000.002000.0022000.00
Fixed Cost for Entire1500000.001500000.001500000.00
Direct Labor Cost Per Unit5.0010.0012.00
Direct Material Cost Per Unit3.004.005.50
Selling Price Per Unit35.0072.00110.00

Based on the above information, you are required to calculate the total variable cost and total cost of production. You can assume that there was no opening inventory.

Solution

Here, the company produces three products, namely, Lux, Clinic Plus, and Fair & lovely. To come up with a total cost of production, we need first to compute the total variable cost per product and then sum up those with a total fixed cost, which shall give us a total cost of production.

LUX

Calculation of Total numbers of goods produced

Total Variable Cost Formula Example 2.1png

=100000+10000

  • Total numbers of goods produced = 110000

Therefore, the calculation will be as follows     

Example 2.2png

= 110,000 x 8.00

Example 2.3png

CLINIC PLUS

Calculation of Total numbers of goods produced

Example 2.4png

=80000.00+2000.00

  • Total numbers of goods produced = 82000.00

Therefore, the calculation of total variable cost will be as follows     

Total Variable Cost Formula Example 2.5png
Total Variable Cost Formula Example 2.6png

= 82,000 x 14 =  11,48,000

FAIR & LOVELY

Calculation of Total numbers of goods produced

Total Variable Cost Formula Example 2.12png

=200000.00+22000.00

  • Total numbers of goods produced = 222000.00

Therefore, the calculation of total variable cost will be as follows     

Total Variable Cost Formula Example 2.11png

=222000.00*17.50

Example 2.10png
Example 4png

Therefore, the total variable cost in producing all the three products will be 880,000 + 11,48,000 + 38,85,000 which is equal to 59,13,000.

Total Cost

Total Variable Cost Formula Example 4.1png

Further we are given that total fixed cost is 15,00,000 and therefore the total cost will be 59,13,000 + 15,00,000 which is 74,13,000.

Example #3

Mr. Bean sells hotdogs in the street in his vehicle. He is interested to know what is the cost that is rising with the number of hotdogs that he sells. He notices that the cost of bread increases whenever there is a demand for the hotdogs, and he noted that per piece, he has to pay $1. Further, he notices that the cost of a vehicle is fixed, which is not changing and is $40,000. On average, he requires sauce, butter, and other stuff, which costs him around $5 per piece. The vegetables cost on an average is $8 per piece. He wants to make a 25% profit on the selling price. If he produces 100 hotdogs, you are required to compute the total variable cost and the selling price that he should keep covering the variable cost, and for the time being, he avoids fixed cost calculation.

Solution

In this example, the variable cost per piece is the cost of bread, which is $1, then material cost, which is $5 and vegetable cost, which is $8 per piece, and hence the total variable cost per unit is $14 per piece.

  • Bread Cost Per Unit: $1
  • Material Cost Per Unit: $5
  • Vegetables Per Unit: $8
  • Total Variable Cost Per Unit: $14

Therefore, the calculation will be as follows     

Example 3.1png

= 14*100

Total Variable Cost Formula Example 3.2png

Selling Price will be –

Total Variable Cost Formula Example 3.3png
  • = $14 / (1-25%)
  • Selling Price = $18.67

Now, if it considers just to cover all the variable costs and wants to earn a 25% profit on selling price, then he wants to earn 33.33% on cost.

Therefore, the selling price would be $18.67.

Relevance and Uses

These are the costs that shall change depending upon the output. Variable costs shall increase as the output increases, and these shall decrease as the output decreases. We cannot control these costs as these remain fixed and will only incur whenever there is the production of goods. These costs help to determine the total production cost, an individual contribution from a given product, etc.

Recommended Articles

This article has been a guide to the Total Variable Cost and its definition. Here we discuss the formula to calculate total variable cost along with practical examples and downloadable excel sheet. You can learn more about accounting from the following articles –

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