How to calculate total variable cost
Total Variable Cost (TVC) is a crucial concept in the field of economics and business management. It refers to the total cost incurred by a company due to variations in production levels. TVC is essential for understanding a company’s overall production costs and figuring out the optimal production level needed to maximize profits. In this article, we will discuss the method of calculating TVC.
Step 1: Identify Variable Costs
The first step in calculating the total variable cost is to identify all the variable costs associated with your production process. Variable costs are those expenses that change as your production levels change. They typically include:
1. Labor costs: Wages paid to employees involved in manufacturing or producing goods or services.
2. Raw materials: The costs of materials that go into producing your goods or providing services.
3. Utilities: Expenses like electricity, water, and gas that vary based on production levels.
4. Packaging expenses: Costs incurred in packaging and shipping products.
Step 2: Determine Quantities
Next, you need to determine the quantities of each variable input used in the production process for a specific period. The period can vary from daily, weekly, monthly, or yearly, depending on your business requirements.
Step 3: Calculate Individual Variable Costs
Now that you have identified all variable costs and their quantities, it’s time to calculate the cost of each variable input. Multiply the unit price of each input by its respective quantity used in the production process during that specific period.
Individual Variable Cost = Unit Price × Quantity
Step 4: Add Up All Individual Variable Costs
Finally, to calculate the Total Variable Cost, add up the individual variable costs obtained in Step 3.
Total Variable Cost (TVC) = Sum of All Individual Variable Costs
Let’s consider a T-shirt manufacturing unit with the following variable costs:
1. Labor cost per T-shirt: $5
2. Raw material cost per T-shirt: $3
3. Utilities per T-shirt: $1
4. Packaging expenses per T-shirt: $0.5
If the company produces 500 T-shirts in a month, the Total Variable Cost would be:
TVC = (Labor × Quantity) + (Raw Material × Quantity) + (Utilities × Quantity) + (Packaging × Quantity)
TVC = ($5 × 500) + ($3 × 500) + ($1 × 500) + ($0.5 × 500)
TVC = $2,500 + $1,500 + $500 + $250
TVC = $4,750
Calculating Total Variable Cost is an essential step in understanding your company’s overall cost structure and optimizing production for maximum profitability. By regularly tracking and keeping an eye on your variable costs, you can make informed decisions that will help your business achieve its financial goals