What is Variable Cost?
Variable cost is the expenses that change with the decrease and increase of the production output of a company. These are the costs that differ with the volume of the output produces. Most of the basic variable costs are:
- Raw material
- Transportation fee, commission
- Utility bills
The formula used to calculate the variable cost:\(Total, Variable, Cost, =, Total , Quantity , of , Output, times , Variable, Cost, Per, Unit, of, Output\)
How to Calculate Variable Cost?
Let’s presume, ABC Company has obtained a consignment for ₹5,000 appliance for an absolute sales cost of ₹5,000 and desire to calculate the gross profit which will be established once the order is complete. First, per appliance and its variable costs must be resolved.
Let’s take the following calculation:
Annual appliance Produced: 1,00,000
Raw Materials Costs: ₹10,000
Direct Labor Costs: ₹50,000
From the above-mentioned details, we can assume that each appliance costs 10 (₹10,000 / 1,00,000 appliance) in raw materials and 50 (₹50,000 / 1,00,000 appliance) indirect labor costs. With the help of the above formula, we can evaluate that ABC Company’s total order variable cost is:
5,000 x (₹0.10 + ₹0.50) = ₹3,000
Hence, the company can anticipate earning a ₹2,000 gross profit (₹5,000 – ₹3,000) from the consignment.
Also Read: What is the Average Fixed Cost?
Where it is used mostly?
In a business, variable cost is mostly used and is an integral part while analysing company’s break-even. The break-even analysis is applied to scan the revenue or the unit that has to sold to cover the total cost.
The formula to determine Break-even:
Break-even point in units = Fixed costs / (Sales price per unit – Variable cost per unit)
For any successful investors, variable costs are essential to determine the percentage of the fixed price and forecast how the company will reciprocate under different operating condition.
The above mentioned is the concept, that is elucidated in detail about ‘How to calculate the total variable cost?’ for the Commerce students. To know more, stay tuned to BYJU’S.