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 committed costsCommitted CostsCommitted Costs are fixed, budgeted, or confirmed payments to be made in the future to vendors for goods or services to be taken, which are necessary for the smooth flow of the business and whose absence may disrupt the main operations of the business, potentially having a significant impact on the company.read more 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
Variable-Cost-Per-Unit

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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:

Calculate the variable cost per unit for September.

Solution

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

Variable Cost Per Unit Example 1

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

Variable Cost Per Unit Example 1.1
  • = $ 1,620,000 / 10,000
  • = $ 162

Thus for September 2019, the variable cost per unitCost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services.read more of the company comes to $162.

Working:

Advantages

The different advantages are as follows:

Disadvantage

The disadvantage is as follows:

  • 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:

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 –

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