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.
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For eg:
Source: Total Variable Cost (wallstreetmojo.com)
Where,
- Variable cost per unit shall include Direct Labor cost, Direct Raw material cost, variable overhead costOverhead CostOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more, etc.
Calculation of Total Variable Cost (Step by Step)
Below are the steps required to calculate –
- Identify the labor hours required per unit.
- Identify the material that is associated with the product and compute the per-unit cost of it.
- We need to identify other variable overheads as well and consider the cost of it per unit.
- Add all of the above per unit cost, which would be the total variable cost per unit.
- Take out the number of units actually produced and not just sold.
- Now multiply the number of units produced by variable cost per unit.
Examples
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
= 1,000 x ( 10.20 + 11.13 + 10.67 )
= 1,000 x 32.00
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.
| Particulars | Lux | Clinic Plus | Fair & Lovely |
|---|---|---|---|
| No of Units Sold | 100000.00 | 80000.00 | 200000.00 |
| Closing Inventory | 10000.00 | 2000.00 | 22000.00 |
| Fixed Cost for Entire | 1500000.00 | 1500000.00 | 1500000.00 |
| Direct Labor Cost Per Unit | 5.00 | 10.00 | 12.00 |
| Direct Material Cost Per Unit | 3.00 | 4.00 | 5.50 |
| Selling Price Per Unit | 35.00 | 72.00 | 110.00 |
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
=100000+10000
- Total numbers of goods produced = 110000
Therefore, the calculation will be as follows
= 110,000 x 8.00
CLINIC PLUS
Calculation of Total numbers of goods produced
=80000.00+2000.00
- Total numbers of goods produced = 82000.00
Therefore, the calculation of total variable cost will be as follows
= 82,000 x 14 = 11,48,000
FAIR & LOVELY
Calculation of Total numbers of goods produced
=200000.00+22000.00
- Total numbers of goods produced = 222000.00
Therefore, the calculation of total variable cost will be as follows
=222000.00*17.50
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
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
= 14*100
Selling Price will be –
- = $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
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