In other words, the total variable cost comprises the cost of production that varies with the change in production and such costs primarily include direct labor cost, cost of raw material and variable manufacturing overhead. So, the average variable cost of plastic balls and boxes is $6.2. There is no actual formula to calculate it, it is just the addition of all the direct costs of producing the good. Variable Overheads – $10.67 The total number of units that were produced was 1,000 units. Break-even Points in Units = Fixed Cost / (Sales Price Per Unit – Variable Cost Per Unit). Calculate the total variable cost of production for the company based on the given information. Variable Cost Per Unit = Labor Cost Per Unit + Direct Material Per Unit + Direct Overhead per Unit Put a value in the above formula. ... into an Excel spreadsheet to calculate the impact of variable costs as production amounts change. You can use the following Total Variable Cost Formula Calculator, This is a guide to Total Variable Cost Formula. The formula can be written as:-. Costs incurred by businesses consist of fixed and variable costs. The company is producing 1000 on an average. Raw material costs per unit will multiple with the total quantity of plastic bag manufactured. Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. 1. You may also look at the following articles to learn more –, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects). The break-even analysis is a vital application of variable costing. Variable Costing Formula helps to determine break-even point. Cost of Raw Material is calculated using the formula given below, Cost of Raw Material = Cost per Metre of Cloth * Length of Cloth Required, Direct Labor Cost is calculated using the formula given below, Direct Labor Cost = Direct Labor Cost per Hour * Number of Man Hours Required, Total Variable Cost is calculated using the formula given below, Total Variable Cost = Direct Labor Cost + Cost of Raw Material + Variable Manufacturing Overhead. Variable Cost Per Unit = 7 + 5 + 1 Cost indifference point can be calculated as follows: Cost Indifference Point = Differential fixed cost/Differential variable cost per unit . ALL RIGHTS RESERVED. Step 3: Next, determine the variable manufacturing overhead which all the remaining variable costs that can be directly assigned to the production process. Example. Solution Here we are given all the variable cost per unit, and therefore we can use the below formula to calculate the total variable cost per unit. = $40 – $25 1. Ltd produces handmade soaps, cost of raw material per unit is $5, the labor cost of production per unit is $7, fixed cost for a month is $500, overhead cost per unit is $1 and salary for office and sales staff is $3,000. Variable Costing Formula helps to decide the price of a product. How to Calculate Production Costs in Excel. The variable costs included in the calculation are labor and materials, plus increases in fixed costs… So, the company needs to sell 150 units of mugs to make the profit. It is essential to understand that since the total variable cost excludes fixed or absorption costs, profit will increase with volume if the additional revenue is higher than the incremental variable cost. Based on these regression results, you can determine that making 1,000 units would create total variable costs of $66,690 (1,000 units x $66.69 per unit). The formula for total variable cost can be computed by using the following steps: Step 1: Firstly, determine the direct labor cost that can be directly apportioned to the production level. We can say that it is directly proportional to the variable cost. The total variable cost of boxes will be:-, Total Variable Cost = Quantity of Output * Variable Cost Per Unit of Output. It is important to understand the concept of total variable cost as it is usually by companies to determine the contribution margin of a product. Business managers calculate a fixed cost per unit to set the production volumes needed to cover their fixed overhead costs and make a profit. Variable cost per pack of candy is $12. Breakeven point formula in Excel. 3. Step 2:Next, determine the number of units produ… Total variable cost is calculated by multiplying the quantity of output into variable cost per unit of output as variable cost depends on the quantity of production which will result in total variable costing of a product. Natural units: fixed cost / (price - average variable costs). The cost per unit is commonly derived when a company produces a large number of identical products. You are to calculate the total variable cost of the product X. Variable costs are costs which are directly related to the changes in the quantity of output; therefore A company named Nile Pvt. As the name suggests, these costs are variable in nature and changes with the increase or decrease in the production level or sales volume. Required sales volume to earn $200,000. © 2020 - EDUCBA. ALL RIGHTS RESERVED. Let us take the example of ZSD Ltd. which is a manufacturer of mobile phone covers. Here we discuss how to calculate Total Variable Cost along with practical examples. In this example, you can assume that the variable cost per unit is £2 and there are 2,000 units = £4,000. Fixed Cost which they have invested in equipment etc. Example of the Total Cost Formula. Average Variable Cost = (8 * 10,000) + (5 * 15,000) / 10,000 + 15,000, Break-even Points in Units = 1,500 /(30-20). Break even point in terms of dollars: Break even point in units × Selling price per unit = 8,000 units × $140 = $1,120,000. Labor costs per unit will multiple with the total quantity of plastic bag manufactured. Step 4: Finally, the formula for total variable cost can be derived by adding direct labor cost (step 1), cost of raw material (step 2) and variable manufacturing overhead (step 3) as shown below. As per the latest annual report, the following financial information is available. A company manufactures plastic bags, the raw material cost for production of 1 bag is $2, labor cost for manufacturing of 1 plastic bag is $10 and fixed cost of the company is $200. Step 2: Next, determine the cost of raw material required in the production process and its computation involves a type of material required, the amount of material used and the rate. … Direct Labor – $10.20 2. Variable Costing Formula helps in profit planning and margin set-up. Direct Material – $11.13 3. It is said variable cost per unit because it depends on the quantity of production. It helps to determine the average cost of production of a single unit of product in a company irrespective of a type of product. A company is incurring $10,000 of fixed costs to produce 1,000 units (for an average fixed cost per unit of $10), and its variable cost per unit is $3. ... the cost per item or unit … Variable cost per unit is the sum of labor cost per unit, direct material per unit and direct overhead per unit. = $50000/10000 Calculation can be done as follows: 1. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS. The fixed costs are those that do not change no matter how many units are sold. Total variable cost is the sum of labor cost and cost of raw material. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Download Variable Costing Formula Excel Template, New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) Learn More, You can download this Variable Costing Formula Excel Template here –, 250+ Online Courses | 1000+ Hours | Verifiable Certificates | Lifetime Access, Examples of Variable Costing Formula (With Excel Template), Finance for Non Finance Managers Course (7 Courses), Investment Banking Course(117 Courses, 25+ Projects), Financial Modeling Course (3 Courses, 14 Projects), Finance for Non Finance Managers Training Course, Quantity of Output x Variable Cost per Unit of Output. A company produces 1000 boxes at an average cost of production of one unit is $20. Essentially, if a cost varies depending on the volume of activity, it is a variable cost. Fixed cost is $200 irrespective of quantity. A company manufactures plastic boxes and plastic balls. Total Variable Cost is calculated using the formula given below Total Variable Cost = Direct Labor Cost + Cost of Raw Material + Variable Manufacturing Overhead Total Variable Cost = $2,000,000 + $5,000,000 + $500,000 Total Variable Cost = $7,500,000 It helps to find the amount of revenue or the units required to cover the total costs of the product. Attention! It can be expressed as:-, Start Your Free Investment Banking Course, Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Download Total Variable Cost Formula Excel Template, New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) Learn More, You can download this Total Variable Cost Formula Excel Template here –, 250+ Online Courses | 1000+ Hours | Verifiable Certificates | Lifetime Access, Total Variable Cost Formula Excel Template, Finance for Non Finance Managers Course (7 Courses), Investment Banking Course(117 Courses, 25+ Projects), Financial Modeling Course (3 Courses, 14 Projects), Manufacturing Overhead | Limitations | Examples, Finance for Non Finance Managers Training Course, Cost of Raw Material = $5 per metre * 1,000,000 metre, Direct Labor Cost = $8 per hour * 250,000 hours, Total Variable Cost = $2,000,000 + $5,000,000 + $500,000, Direct Labor Cost = $12 per hour * 0.5 hours * 100,000, Variable Manufacturing Overhead = $200,000 + $150,000, Total Variable Cost = $600,000 + $800,000 + $350,000. At the 1,000-unit production level, the total cost of the production is: The formula for the calculation of the Variable Cost Per Unit is as follows. Variable cost per unit of plastic balls is $5 and 15,000 boxes are manufactured by the company. So, total variable cost of 1000 boxes is $20,000. There are 2 ways to calculate the breakeven point in Excel: Monetary equivalent: (revenue*fixed costs) / (revenue - variable costs). This can help to develop pricing strategies. Although the high low method is easy to calculate and helps us in forecasting future costs, it is not very commonly used because it has certain limitations: 1. Sources and more resources. The contribution margin per shoe is ($500,000 – $250,000 – $200,000) / 10,000 There are many uses of variable costing formula they are as follows:-, You can use the following Variable Costing Calculator, This has been a guide to a Variable Costing formula. Variable Cost Per Unit = Total Variable Expenses / Output of the Company. So, variable cost per unit of soap is $13 and total variable cost of soap is $65,000. Variable Cost Per Unit = Labor Cost Per Unit + Direct Material Per Unit + Direct Overhead per Unit, Total Variable Cost = Quantity * Variable Cost Per Unit. Variable Costing Formula (Table of Contents), Variable costing is the expense that changes in proportion with production output. Divide fixed costs by $25 and you have a breakeven sales volume of 28,000 units. Variable Costing plays a vital role in decision making. Variable cost per unit of plastic boxes is $8 and 10,000 boxes are manufactured by the company. We also provide a Total Variable Cost calculator with a downloadable excel template. Break even point in terms of units: Fixed cost/(Selling price per unit – Variable cost per unit) = $400,000/($140 – $90) = $400,000/$50 = 8,000 units. Now, let us see one more example to calculate the total variable cost and its dependency on quantity. Since fixed costs are a type of sunk cost, a company should make sure that any order that they execute should at least cover the total variable cost so that they generate some cash inflow. 2. The variable cost per unit equals $15. Further, the total variable cost can also be applied to plan additional production units by improving efficiency or hiring contractual manpower in order to add to the bottom line of the company i.e. Subtract the variable cost per unit of $15 from the $40 price, leaving $25. Variable Cost Ratio: The variable cost ratio is an expression of a company's variable production costs as a percentage of sales, calculated as variable costs divided by total revenues. It … Variable vs Fixed Costs in Decision-Making. Total fixed costs would equal $39,739, so total costs would be $106,429: Total cost = (Variable cost per unit x Units produced) + Total fixed cost Therefore, the total variable cost of production ($1,750,000) is lower than the contract size ($2,000,000) which means that ZSD Ltd. Can accept the order. Let us take the example of a company named DHK Ltd. which engaged in the manufacturing suits in the state of California. Direct overhead is another extra cost required for the production of one unit it is variable as it depends on the quantity of production. The first limitation is that this method assumes that there is a linear relationship between cost and activity which is not the case always. Total Variable Cost = Quantity of Output * Variable cost per unit of output. Total expense done in business is the sum of variable cost and fixed cost where fixed cost is fixed irrespective of quantity manufacture or produced whereas variable cost depends on quantity produced. net income. Calculate the average variable cost. A manufacturing unit that produces X as a product has the following variable cost per unit. The formula for total variable cost can be derived by adding direct labor cost, cost of raw material and variable manufacturing overhead. A company produces mugs has a fixed cost of $1,500, variable cost per unit of $20 and sales price per unit is $30, now we have to calculate break-even point of same. Alternatively, we may calculate the indifference point by setting up an equation where each side represents total cost under one of the alternatives. Solution Use below given data for the calculation. The marginal cost formula = (change in costs) / (change in quantity). Suppose there is an FMCG company which is producing candy for kids. Now, we will calculate the variable cost and total cost. Recently the company has received an order worth $2,000,000 for 100,000 mobile covers. The calculation can be done as follows- 1. If variable cost increases, production output also increases and if variable cost decreases, product output also decreases. The total variable cost of a firm is $50,000 in a year. This is the difference in the actual versus expected unit volume of whatever is being measured, multiplied by the standard price per unit. The term “total variable cost” refers to that portion of the overall expense, related to the production of goods or services, that can change in direct proportion to the quantity of production. Put the value in the above Average Variable Cost formula. We can say that expenses depend on the output with a change in the output of production input expense change. Therefore, the total variable cost of DHK Ltd. during the interim period remained $7,500,000. Total variable cost is equal to the quantity of output into variable cost per unit of output. Cost of Raw Material = Cost of Raw Material per Cover * Number of Covers, Direct Labor Cost = Direct Labor Cost per Hour * Man Hours Required per Cover * Number of Covers, Variable Manufacturing Overhead is calculated using the formula given below, Variable Manufacturing Overhead = Equipment Maintenance + Utilities.