The average total cost of a firm is $40 while the average fixed cost is $25. Therefore, the total variable cost of DHK Ltd. during the interim period remained $7,500,000. 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. Break even point in terms of dollars: Break even point in units × Selling price per unit = 8,000 units × $140 = $1,120,000. Step 3: Next, determine the variable manufacturing overhead which all the remaining variable costs that can be directly assigned to the production process. Break-even points in units are fixed cost divided by sales price per unit minus variable cost 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. 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. 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. Example of the Total Cost Formula. Formula for Variable Costs . Variable cost per unit is the sum of labor cost per unit, direct material per unit and direct overhead per unit. Total variable cost is the sum of labor cost and cost of raw material. Variable Costing Formula helps to decide the price of a product. 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. 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. 1. You may also look at the following articles to learn more –, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects). Divide fixed costs by $25 and you have a breakeven sales volume of 28,000 units. This can be calculated by dividing variable costs per unit by total per-unit cost using the formula {\displaystyle {\frac {v} {v+f}}} where v and f are the per-unit variable and fixed costs, respectively. Subtract the variable cost per unit of $15 from the $40 price, leaving $25. The variable cost per unit equals $15. ALL RIGHTS RESERVED. Total variable cost is equal to the quantity of output into variable cost per unit of output. The variable cost per unit is a concept on its own. Total cost is sum of fixed cost and variable cost. Here we discuss how to calculate Total Variable Cost along with practical examples. Let’s take an example to understand the calculation of Total Variable Cost Formula in a better manner. Variable cost per unit of plastic balls is $5 and 15,000 boxes are manufactured by the company. The AVC is $15 per unit. As such the chief accountant provided the following information that has been confirmed by the Finance Director of the company. This information is then compared to budgeted or standard cost information to see if the organization is producing goods in a cost-effective manner.. The break-even analysis is a vital application of variable costing. 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. Now, let us take an example to understand Variable Costing formula in a better manner. The cost per unit is derived from the variable costs and fixed costs incurred by a production process, divided by the number of units … 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. It is said variable cost per unit because it depends on the quantity of production. 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. Raw material costs per unit will multiple with the total quantity of plastic bag manufactured. 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 The calculation can be done as follows- 1. 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 Step 2:Next, determine the number of units produ… Variable cost per pack of candy is $12. Recently the company has received an order worth $2,000,000 for 100,000 mobile covers. Step 1: Firstly, the variable cost per unit has to be calculated based on variable costs from the profit and loss account and 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. 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. Natural units: fixed cost / (price - average variable costs). Fixed Cost which they have invested in equipment etc. So, the average variable cost of plastic balls and boxes is $6.2. Total Variable Cost = Quantity of Output * Variable cost per unit of output. If there are changes in fixed or variable cost wit… Total Variable Cost is calculated using the formula As the name suggests, these costs are variable in nature and changes with the increase or decrease in the production level or sales volume. 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. This is the difference in the actual versus expected unit volume of whatever is being measured, multiplied by the standard price per unit. There are 2 ways to calculate the breakeven point in Excel: Monetary equivalent: (revenue*fixed costs) / (revenue - variable costs). We also provide you Variable Costing Calculator with downloadable excel template. © 2020 - EDUCBA. It helps to determine the average cost of production of a single unit of product in a company irrespective of a type of product. The formula for contribution margin dollars-per-unit is: (Total revenue – variable costs) / # of units sold . is $10,000. Here we discuss How to Calculate Variable Costing along with practical examples. We can say that expenses depend on the output with a change in the output of production input expense change. Variable Costing plays a vital role in decision making. Let’s see an example to understand Variable cost per unit better. So, variable cost per unit of soap is $13 and total variable cost of soap is $65,000. 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. 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