Variable Cost: Definition, Examples & Formula

average variable cost

In addition to fixed costs and variable costs, a third type known as semi-variable costs also exists. Both fixed and variable costs are included in semi-variable costs. Costs for semi-variable expenses are constant up to a specific point in manufacturing, at which point they become variable. The contribution margin is the difference between the total amount of revenues and the total variable costs involved in the production of goods sold.

Strategy making is an integral part of any organization. Whether you’re trying to promote your brand-new product, stay ahead of your competitors, or cut down on your expenses, you need to have a strategy in place. Break-even analysis helps you to formulate these strategies. This helps you craft a more formidable strategy and reap better benefits for your company.

When you’re launching a new range of items, you need to know what are the minimum number of units you need to sell to recover your fixed and variable cost. Whenever a business alters its business model, costs can change considerably depending on whether they are downsizing or scaling up. Thus, break-even analysis is also important for organizations to determine selling prices while changing their business models. Using a set period allows you to analyze when you are breaking even and earning a profit. Variable costs are expenses that fluctuate throughout time. Making a strategy might assist you in managing their unpredictability.

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A firm has to incur fixed cost whether it is making sales or not. Examples of fixed costs are rent, office supplies, salaries given to employees, etc. Whether sales happen or not, the company has to pay the rent.

Johnny’s fixed expenses are his rental and taxes, which he must pay regardless of how many meals he delivers or not. Nevertheless, Johnny must also purchase kitchen supplies, pay his employees’ salaries, and pay his monthly utility bills. The break-even position is determined by variable costs. Here we will learn how to calculate variable costing with examples, a Calculator, and an excel template. Sales tax and road tax can be distributed over the life of the machine. Farm machinery is sometimes insured against loss by theft or damage.

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The average variable cost is the variable cost per unit. Analyze use the cost to determine if production should be temporarily shut. If you sell the products at a higher price than average variable cost and fixed costs, then your business can continue with the production. Variable cost and fixed cost together constitute the total expenses of a business. While Variable cost varies with the number of units produced, fixed cost doesn’t vary with production levels and remains constant.

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Suppose the number of cupcakes made by the baker varies. She needs to travel across the country for another assignment, and all of her airfare are variable costs. To accomplish her profession, she leases a portable office. She purchases windows apps tailored to the job and enrols in an online class and learn how to use them. She will have to raise cash to acquire the latest software and pay for the tuition, and the outstanding debt will be a variable cost. Johnny runs a European eatery that specialises in rice and noodles.

What to keep in mind before performing break-even analysis?

Now say, keeping the demand into consideration they increase their production to 750 units in a day. The total fixed cost is the sum of depreciation , interest on investment and Taxes, Insurance and housing charges. While calculating the marginal cost, we need to divide the change in total cost by the change in quantity.

  • Marginal costing separates the variable cost from the fixed cost.
  • Marginal cost is not the cost of producing the next and last unit.
  • Fix costs often relate to time period , and generally do not change over time.

Variable costs may include wages, utilities, materials used in production, etc. In terms of variable costs, the company produces 2000 widgets at $10 per unit. The total variable costs are $20,000 and $5000 labor costs. Subtract the average variable cost from average total costs.

The break-even point makes it easy to plan, analyze, and review the progress of your project or plan. However, not everyone wants to calculate their break-even point manually. This ready-to-use tool solves this problem and makes this important statistic quick and convenient.

Subtract the variable price per unit of $15 from the $forty worth, leaving $25. Divide mounted costs by $25 and you’ve got a breakeven sales quantity of 28,000 models. Marginal cost is not the cost of producing the next and last unit. In the short term increasing production requires more variable input, usually assumed to be labor. Adding more labor to a fixed capital cost reduces the marginal cost of labor.

Average total cost

Depreciation – It is the reduction in value of the machine with the passage of time. In the usual situation with field machines being operated only a few days in a year year, obsolescence is the most important factor affecting the depreciation . A machine may become obsolete because of the development of improved models, changes in farm practices etc.

We calculate marginal costs by computing the change in production costs divided by the change in the number of goods produced. The difference between the selling price of the product and its variable cost is called the contribution margin. It is the amount which covers fixed costs and generates a profit.

The marginal cost function is derivative of the total cost function C. To find the marginal cost, derive the total cost function to find C’. A marketing consultant works on a variety of agreements, each with its own set of charges, she has a lot of overhead expenses.

Since fixed costs are constant the only change that occurs in TC is due to total variable costs. The average total cost is the per-unit cost of the number of products that are made. The average total costs include fixed and variable costs. Fixed costs are expenses that do not change with the number of goods produced. Variable costs are costs dependent on the number of goods or services produced.


In most instances, increasing manufacturing will make every extra unit extra profitable. This is as a result of fixed costs are actually being spread thinner across a larger manufacturing volume. For example, if a enterprise that produces 500,000 units per years spends $50,000 per yr in hire, lease costs are allotted to each unit at $0.10 per unit.

What do you mean by Total Fixed Cost TFC Total Variable Cost TVC and Total Cost TC of a firm? How they are related?

Fixed expenses, such as automobile instalments, often remain constant over time, but expenditures alter. Variable expenses are less reliable, but they often provide more financial freedom. Calculate your overall expenditures over a specified timeframe. They can be calculated by deducting fixed expenses from overall costs for the period if they are undetermined.

Daily provisions of raw materials – vegetables, white and red variety of meat, and spices among others. Supplies used in the production process – This includes machines and miscellaneous tools. The various materials that are involved in the making of the product – this involves all the materials used in the manufacture of the final products. For example, all tangible ingredients like fabric for making clothes, specific glue for footwear, circuit boards in assembling computers or even steel in construction. To manufacture one quantity of output or produce a product, primary tools are essential. Labour cost refers to the time spent on a single item of manufacturing or performing a job.

At this stage, if your current plan seems unfeasible, eg. You may need to sell a lot more products to achieve break even, it is a good time to analyze the situation in a holistic approach. There are more than a few ways to calculate your break-even point. If we look at the schedule below SMC can be calculated from the difference in TVC or TC the values remain the same as TFC is constant.

  • You need to understand different cost factors and how it affects profitability.
  • Johnny runs a European eatery that specialises in rice and noodles.
  • Average cost starts high because of the low denominator.
  • Under this step, generally, results are analyzed to make informed decisions.

Your total variable cost is equal to the variable cost per unit, multiplied by the number of units produced. Your average variable cost is equal to your total variable cost, divided by the number of units produced. It is important for an organization to understand nature of cost to calculate how much it is spending on production. Cost can be either variable cost or fixed cost based on its nature. Unlike fixed costs, variable costs are directly related to sales volume.

The cost of setting up will be the identical whether or not the printer produces one copy or 10,000. It is necessary to remember that all non-discretionary fastened prices will be incurred even if production or gross sales quantity falls to zero. For example, a company might pay a gross sales person a month-to-month wage plus a proportion commission for every unit sold above a sure level . 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.

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Iv) Without an effective accounting team, it is important the analysis could yield incorrect results. To determine the profitability of one’s business, it is important to calculate the break-even point. The Break-even point is the point where your total expenses match the total revenue, a point without any profit or loss, i.e. break-even. To put it in layman’s terms, the point where you finally recover all the capital costs borne to set up the business. Variable costs are not only a major part of running a business, they also can be key to turning breaking-even into profits. Also, it is easier to recover the variable costs from sales.

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how to calculate variable cost fixed cost is the fixed costs to produce one unit of the product. Typical fixed costs are the salary of permanent employees, rent, mortgage payments, etc. We calculate average fixed costs by dividing the total fixed costs by the output level. In this section, we find out how to calculate the average fixed costs. Every commercial business has various types of expenses resulting from different types of activities. Whenever the manufacturing activity undergoes changes, the cost for those activities also changes.

Variable costs fluctuate according to how many items or operations are generated. The narrower the revenue percentage, the far more variable expenses there are. Aircraft, for example, have become less susceptible to rivalry because of their large operating expenses. To get started, they need to make a significant investment in hardware and other tangible objects. Marginal costing is a very important method that is used in cost accounting.

A high volume of production increases the variable costs. They decrease when the manufacturing process is experiencing a slow-down because of fewer sales. In economics, the total cost is the total economic cost of production. It has two components the fixed costs and variable costs. Variable costs change according to the volume of goods or services being produced. Fixed costs are independent of the number of goods being produced.