How To Calculate Total Variable Cost
Total Variable Cost (TVC) represents the cumulative expenses directly linked to production that fluctuate with changes in output levels. Know the definations, factors and formula for Total Variable Cost
Shruti Dutta12 May, 2024
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Total Variable Cost: Understanding total variable costs is essential for businesses to manage expenses and optimise profitability effectively. Total variable cost represents the combined expenses that fluctuate with changes in production levels, directly impacting the cost structure of operations. This article will explore how to calculate total variable cost, providing businesses with valuable insights into their cost structure and enabling informed decision-making. By mastering the calculation of total variable cost, businesses can better understand their financial performance, streamline budgeting and planning processes, and implement strategies to enhance profitability in today's competitive business environment.
What is Variable Cost
Variable costs are expenses incurred in business operations that are not fixed and may fluctuate depending on changes in production volume. Several expenses will adjust accordingly if a company produces more or fewer products than initially estimated. Production output plays a significant role in determining these variable costs. For example, the cost of packaging will increase or decrease with changes in production volume. Consider a company that typically produces 500 coffee mugs daily but increases production to 750 units due to increased demand. As a result, the cost of packaging will rise because the company will require additional resources such as paper boxes, gift wraps, and labour. In this scenario, the cost of packaging is considered variable as it changes in proportion to the final product output.Total Variable Cost Formula
The total variable cost is determined by multiplying the quantity of output by the variable cost per unit of production using the following formula:Total Variable Cost = Total Quantity of Output × Variable Cost Per Unit of Output
The variable cost per unit may differ among products. It can be calculated by aggregating the various variable costs mentioned earlier. When variable costs are incurred in batches, such as purchasing 100 pounds of raw materials to manufacture 10,000 finished goods, they may need to be allocated across goods accordingly. Here’s how it works :- Variable Cost per Unit : The cost of producing one additional product unit. It includes costs like raw materials and direct labour.
- Total Quantity of Units : This is the total number of units produced.
Total Variable Cost Type
Certain costs vary based on the production level in manufacturing and distributing products for a leading sports apparel company. Here are some examples of these variable costs:- Raw Materials : These are the direct materials purchased and used to create the final product. The cost of these materials changes depending on the number of units produced. Leather, synthetic mesh, and canvas used in shoe production are examples of raw materials.
- Direct Labor : The cost of direct labour is directly influenced by the number of units produced. Your production efforts directly impact the company's direct labour costs. While some roles, such as salaried positions like accountants or lawyers, have fixed compensation irrespective of production levels, the earnings of hourly workers increase with higher production, leading to increased direct labour costs.
- Commissions : Commissions, which are additional compensation given as a percentage of sales proceeds, vary with the level of sales activity. They increase or decrease based on the achievement of sales performance targets.
- Utilities : The cost of utilities, such as energy, changes with production levels. When production increases, energy consumption rises, leading to higher variable utility costs. Conversely, when operations stop, energy consumption and utility costs decrease.
- Shipping/Freight : The shipping cost depends on the number of units shipped. The expenses associated with packaging and shipping a product change with activity levels. While some shipping costs may be fixed, many additional costs are variable and directly related to the quantity of production and shipments.
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Total Variable Cost Example
This table showcases variable costs associated with producing cupcakes at a bakery. As the number of cupcakes baked increases, the total variable cost will also increase proportionally.| Cost Description | Cost per Cupcake (₹) | Total Cost for 10 Cupcakes (₹) | Total Cost for 50 Cupcakes (₹) |
| Flour | 2 | 20 | 100 |
| Sugar | 1 | 10 | 50 |
| Eggs | 0.50 | 5 | 25 |
| Butter | 1.50 | 15 | 75 |
| Milk | 0.75 | 7.5 | 37.5 |
| Cupcake Liners | 0.25 | 2.5 | 12.5 |
| Direct Labor (decorating) | 1 | 10 | 50 |
| Total Variable Cost per Unit | 7 | 70 | 350 |
- This is a simplified example, and actual costs may vary depending on specific ingredients, labour rates, and other factors.
- Direct labour for decorating is assumed to be a variable cost, as decorating time might increase with more cupcakes.
- The table shows the total cost for 10 and 50 cupcakes, illustrating how the variable cost increases proportionally with production volume.
Difference Between Total Variable Cost
Total variable cost refers to the aggregate expense incurred by a company that fluctuates directly to production output or sales changes. It includes all costs directly associated with producing goods or services that vary as production levels change. These costs typically include raw materials, direct labour, and other expenses directly tied to production, such as utilities or packaging materials.| Aspect | Variable Costs | Fixed Costs |
| Definition | Costs that vary with the level of production or sales. | Costs that remain constant regardless of the level of production or sales. |
| Nature | Directly tied to production or sales volume. | Independent of production or sales volume. |
| Examples | Raw materials, labour (per unit), utilities (usage-based). | Rent, salaries of permanent staff, insurance. |
| Behaviour | Changes with fluctuations in production or sales. | Remains stable over a range of production or sales levels. |
| Flexibility | It can be adjusted in the short term. | Often inflexible in the short term, requiring longer-term decisions to change. |
| Influence | Typically, it increases with increased production or sales. | Unaffected by changes in production or sales. |
| Control | It can be managed directly by altering production levels. | Less directly controllable in the short term. |
| Impact on Profit | Directly impacts profit margins, as they increase or decrease with production or sales levels. | Do not directly affect profit margins but contribute to the break-even point. |
Total Variable Cost FAQs
What is total variable cost (TVC)?
Total variable cost represents the aggregate expenses directly associated with production that fluctuate with changes in output. It includes costs such as raw materials, direct labor, and other production-related expenses. The formula to calculate TVC is: Total Output Quantity x Variable Cost per Output Unit.
How do you calculate total cost (TC)?
Total cost comprises both fixed costs (FC) and variable costs (VC). It is calculated by adding together the fixed costs and variable costs. The formula for TC is: Total Costs = Fixed Costs + Variable Costs.
How does understanding costs contribute to overall business success?
Understanding costs enables businesses to make informed strategic decisions, improve financial performance, maintain competitiveness, and achieve long-term sustainability. It is integral to achieving overall business success and growth.
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