Variable cost refers to the cost incurred in various business operations which aren’t fixed and may change depending upon the change in volume of production. It means, if a company produces less or more than the estimated quantity of products, then the cost for several expenses change accordingly.
Therefore, production output is responsible for varying cost. For instance, the cost of packaging will increase with a change in the volume of production. A company used to produce 500 units of coffee mugs. Now say, keeping the demand into consideration they increase their production to 750 units in a day.
Understandably, the cost of packaging will increase as the company will require more resources for packaging like paper boxes, gift wrap, or human resource. That is likely to increase the cost of packaging too. Hence, the cost of packaging, in this case, is variable as it changes with the increase or decrease in the proportion of final products.
Examples of Variable Costs
With the explanation mentioned above, these can be a few examples of variable cost in an organisation.
Raw material
Direct labour
Packaging
Transportation expenses
Utility costs
Commissions
Billable labour
Transaction fees, etc.
Variable Cost Formula
The formula for the variable cost is simple as one just needs to add the various kinds of variable expenses made in the organisation.
For instance, a cupcake company produces 20 units of a cupcake, which requires raw materials worth Rs.500, direct labour costs Rs.1000, and packaging cost Rs.200. In this case, the variable cost will be calculated as a sum of raw materials, labour costs, and packaging cost, i.e. Rs. 1700. That is the variable cost to produce a single kind of product. Further, if the raw material costs, labour costs, and packaging costs are mentioned for one unit, then the sum should be multiplied against the number of products produced by the company.
Now, this variable cost can be represented into two different ways
Total variable cost
Average variable cost
Total Variable Cost
To calculate the total variable cost, you need to consider all kinds of products developed or manufactured by the company. First, calculate the variable cost of each unit and multiply it with the quantity of units produced. Repeat the same for all kinds of products and then add the individual variable costs calculated.
Total Variable Cost Formula = cost of manufacture * number of units of the product
For example, a company produces different types of scented candles. They have three products with the flavours Jasmine, lavender, and lily. Now, the variable cost per unit for Jasmine is Rs.10. Variable cost per unit for lavender is Rs.20, and variable cost per unit for Jasmine is Rs.5. The company produces 50 units of Jasmine, 30 units of lavender, and 20 units of lily candles.
Then as per TVC formula, it will be = [(10*50) + (20*30) + (5*20)]
Therefore, the total variable cost will be Rs.1200.
Average Variable Cost
The average variable cost is an estimation of how much it takes to produce one unit of products.
Average variable cost = (TVC of 1st product + TVC of 2nd product + … TVC of nth product) / Number of units produced
Break-Even Analysis
Variable costs play a crucial role in break-even analysis that is useful in the determination of the required revenue, which is sufficient to compensate for all incurred costs (especially fixed cost).
Break-even point (in units) = Fixed costs / (Sales price per unit – Variable costs per unit)
Therefore, companies need to reach their break-even point so that they don’t undergo any losses and head towards earning profit. And hence the study of variable and fixed costs is crucial for students. They need to know the formula to find variable cost so that they can determine business conditions better and perform accordingly.
Since you are now familiar with the concept of variable costs incurred in an organisation, it is about time to test your knowledge. Try answering these questions on your own.
Questions to Answer
Consider the Variable Cost Per Unit as Rs.25 and the Proportion of Sold Items is 5,000 units. The Calculated Total Variable Cost Will be Equal to
Rs.1,35,000
Rs.1,55,000
Rs.1,25,000
Rs.1,50,000
Answer: c
2.The Difference Between Fixed Cost and Variable Cost is Known as
Marginal income
Operating income
Unit income
Fixed income
Answer: b
3.Variable Costing Can also be Called as
Direct costing
Marginal costing
Indirect costing
Both ‘a’ and ‘b’
Answer: d
Since such concepts are significant from a business perspective, it becomes necessary for students to get in-depth knowledge about the topic. In addition to this, they can acquire comprehensive study material from Vedantu’s website or one can download the app to access quality study notes anytime and from anywhere.
FAQs on What Is Variable Cost? Explained
1. What is the Variable Cost?
Ans: Variable Cost is the varying cost incurred in operating or expenses that are directly affected by the change in production volume. Therefore, with an increase or decrease in the proportion of this final product, the expenses also vary in accordance.
2.How to Calculate the Variable Cost?
Ans: Variable Cost can be calculated by adding the various costs of manufacturing right from the purchase of raw materials to payment of labours. The sum results in variable cost incurred in producing a good.
3. How to Find Total Variable Cost?
Ans: Total variable cost is the product of manufacturing cost with units produced by a company. That output gives estimation about the total variable cost incurred in manufacturing a single or multiple products.
4.How do you Find a Variable Cost Per Unit?
Ans: Variable Cost per unit is the cost of production incurred in producing a single unit of product. You can calculate the variable price per unit by dividing the total variable cost by the number of units produced in an organisation.
