Definition of Total Variable Cost

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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)

Examples

Example #1

A manufacturing unit that produces X as a product has the following variable cost per unit.

  • Identify the labor hours required per unit. Identify the material that is associated with the product and compute its per-unit cost of it. We must also identify other variable overheads and consider their cost per unit. Add all of the above per unit cost, 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.

  • Direct Labor – $10.20Direct Material – $11.13Variable Overheads – $10.67

The total number of units produced was 1,000 units. You are to calculate the total variable cost of product X.

Solution

Here we are given all the variable costs per unit, and therefore we can use the below formula to calculate the total variable cost per unit.

  • Direct Labor Per Unit: $10.20Direct Material Cost Per Unit: $11.13Variable 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

HUL produces many different types of products and is a large company. It is one of the largest FMCGFMCGFast-moving consumer goods (FMCG) are non-durable consumer goods that sell like hotcakes as they usually come with a low price and high usability. Their examples include toothpaste, ready-to-make food, soap, cookie, notebook, chocolate, etc.read more companies 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 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.

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.

Here, the company produces three products: 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

=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

=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 the cost is 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 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 vegetable cost, on 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.

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: $1Material Cost Per Unit: $5Vegetables Per Unit: $8Total Variable Cost Per Unit: $14

= 14*100

The selling price will be –

  • = $14 / (1-25%)Selling Price = $18.67

Now, if it considers covering all the variable costs and wants to earn a 25% profit on selling price, it 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 decrease as the output decreases. These costs help determine the total production cost, an individual contribution from a given product, etc. We cannot control these costs as these remain fixed and will only incur when there is goods production.

This article has been a guide to the Total Variable Cost and its definition. Here we discuss the formula to calculate total variable cost along with practical examples and a downloadable excel sheet. You can learn more about accounting from the following articles –

  • Cost Per UnitProduct CostFormula of Average Total CostCompare – Average Cost vs Marginal Cost