Variable costs are those expenses which change in proportion to the activity of business. The total sum of marginal costs for overall units produced is called the variable cost. It is important to know how to calculate variable cost and this article will give you the steps for its calculation.
Fixed cost and variable cost are two component of the total cost. Direct costs can easily be associated with a particular cost object. However, all variable costs are not direct costs. For example, variable manufacturing overhead costs are those variable costs which are indirect costs. Sometimes variable costs are called unit level costs as they vary with the number of unit produced.
For example, let’s take raw materials and its packaging. If you wish to get more output then you have to give more input and you have to buy more packaging to distribute your product. To find out the variable cost, you need to add up each variable cost in your production. If you want to run a business, you must know the variable cost per unit of each good produced.
Steps to calculate variable cost
- Find out the list of your variable costs and determine the time period for which you want to do the calculation. For example, assume you are managing a production plant which has the cost of direct labor (workers working in plant), raw materials and packaging materials. You have to look at the variable cost each month.
- Compute the price of each of your variable costs. The prices of your variable costs are their prices. In the same example, let us assume the wages paid for direct labor are Rs 1000, the price paid for packaging is RS 1000 and raw materials are of Rs 1000.
- Add each variable cost.
Rs (1000 + 1000 + 1000) = Rs 3000
Rs 3000 is your total variable cost for the month.
- The variable costs of the time period taken earlier should be divided by the total number of products produced during the period. Let us assume that the total number of products produced is 10000 and each of the variable cost is Rs 1000 here so Rs 1000 / Rs 10000 = 0.10.
- Now you can see here that each variable cost contributes 10 paisa to every rupee of your total per unit cost. In total, variable costs contribute for 10 paisa for each rupee you spend.
This calculation is used in break even analysis which is used to measure the profitability of a business.
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