Variable Cost Per Unit  Variable Cost Per Unit Definition

Variable cost per unit refers to the cost of production of each unit produced in the company which changes when the volume of the output or the level of the activity changes in the organization and these are not the of the company as they occur only in case there is the production in the company.

Variable Cost Per Unit Formula

The formula for the calculation of the Variable Cost Per Unit is as follows

Variable Cost Per Unit = Total Variable Expenses / Output of the Company

For eg:
Source: Variable Cost Per Unit (wallstreetmojo.com)

Where,

• Total Variable Expenses = Total variable expenses refers to all those costs incurred by the company during the period total of which change when the volume of the output or the activity changes in the company where the change in the variable expenses will be in the proportion of the difference in the output of the company. Some common variable cost includes the cost of the raw material, cost of the direct labor or the casual labor, fuel expenses, packaging expenses, etc.
• The Output of the Company = Output refers to the total number of the units produced by the company during the period under consideration.

Example of Variable Cost Per Unit

The following is the example of a variable cost per unit.

You can download this Variable Cost Per Unit Excel Template here – Variable Cost Per Unit Excel Template

X ltd. has the business of manufacturing and selling readymade garments in the market. During September 2019, it incurred some of the expenses which are given below. Also, during the same month, it produced 10,000 units of the goods. Mr. X now wants to know the variable cost per unit for September 2019.

Transactions during the month are as follows:

• for the month: \$ 1,000,000
• for the month: \$ 500,000
• Paid the rent for the whole year, amounting to \$ 48,000.
• Paid for the packing expenses required in September amounting \$ 20,000
• Other direct for the month amounts to \$ 100,000
• Insurance Expenses for the whole year paid in September amounting to \$ 24,000.

Calculate the variable cost per unit for September.

Solution

Calculation of Total Variable Expenses using below formula is as follows,

Total Variable Expenses = Direct Material Cost + Direct Labor Cost + Packing Expenses + Other Direct Manufacturing Overhead

• = \$ 1,000,000+ \$ 500,000 + \$ 20,000 + \$ 100,000
• Total Variable Expenses = \$ 1,620,000

Output of the company = 10,000 units

Calculation of Variable Cost Per Unit

• = \$ 1,620,000 / 10,000
• = \$ 162

Working:

• Direct material expenses change with change in the level of production and thus will be considered as a variable cost.
• Direct labor expenses change with change in the level of production and thus will be considered as a variable cost.
• The company pays rent amount in advance for the whole year, so it is the fixed expense and will not be a part of the variable cost.
• Packing expenses changes with change in the level of production and thus will be considered as a variable cost.
• Other direct manufacturing overhead changes with change in the level of production, and thus will be considered as a variable cost.
• is paid by the company in advance for the whole year, so it is a fixed expense and will not part of the variable cost.

The different advantages are as follows:

• It helps the company in knowing that what will be it’s the per-unit cost of production and hence helps in the calculation of the and of the company.
• With the calculation of the variable cost per unit, top management gets more defined data, which will help them for the decision making that may be required in the future for expanding the business.
• With the help of the variable cost per unit, management will be able to know that what is the minimum price that the company is required to offer to its new customer in case it gets bulk order by considering the as the as it will be incurred in case even if there is no production in the company.

• In case the company is not able to segregate the expenses into variable and fixed cost correctly, or in case any error occurs in such bifurcation. The variable cost per unit cannot be calculated correctly.

Important Points

The different vital points are as follows:

• To calculate the variable cost per unit, the company requires two components, which include total variable expenses incurred during the period and the total level of production of the company.
• A company which is having a relatively high variable cost will be able to estimate the per unit more accurately.

Conclusion

Thus the variable cost per unit is a cost per unit incurred by the company, which changes with the change in the level of production in the company. To calculate the variable cost per unit, the company requires two components, which include total variable expenses incurred during the period and the total level of production of the company.

It helps in the calculation of the contribution per unit and break-even analysis of the company, which will help the management of the company for the decision-making process that may be required in the future for expanding the business and approval of the new orders.

This article has been a guide to Variable Cost Per Unit and its definition. Here we discuss how to calculate variable cost per unit using its formula, along with an example, advantages and disadvantages. You can learn more from the following articles –