One of the core components of every business is the total variable cost. In every business, it is very important for you to know the aggregate amount of all the costs associated with goods sold in the period of reporting.
It is one of the key components in any corporate business that looks towards making profits. This article will guide you through the total variable cost related with the cost of goods sold within a particular period of time.
What Is Total Variable Cost?
Total variable cost is the aggregate of all variable costs in a firm with relation to the production over a given period of time. The total cost of a company with Its expenses that changes in relation is a TVC.
TVC is connected directly to the volume of a business and its production is not fixed as it may decrease with time and also increase due to some reasons as it depends on the production made by the company.
It is very different from fixed costs because as you already know, fixed costs still remain the same regardless of the production but TVC on the other hand really fully depends on the productivity of the company which is why it doesn’t stay the same.
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How Does It Work?
There are different examples of total variable costs which includes the commission of sales, packaging, the raw materials needed for the production, all the labor that is linked with the process of manufacture and all the other expenses that is related to the process of production.
One thing about this is that once the commission products used for productivity are fewer, the variable cost will decrease.
TVC is one of the costs under the total cost and the several other costs associated with the total cost like the variable and fixed cost are dependent on a specific production amount. Once the specific production amount has been exceeded, the cost will change.
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Total Variable Cost Formula
The formula for total variable cost makes it very easy to calculate it.
Total output quantity × Variable cost of each unit gotten from the output = Total variable cost
How To Find Total Variable Cost
Finding TVC is very easy as it only requires you to calculate the TVC by multiplying the cost to get a unit of the product by the amount of products that has been developed.
An easy way to find TVC is by using the simple formula used to calculate it for a particular period which is;
Total output quantity × Variable cost of each unit gotten from the output = Total variable cost
Apart from knowing the formula used to calculate it, you must use the steps below to get an accurate TVC of your business or company.
- Look out for all the variable costs that is associated with the company’s production of one unit of each product. The known variable costs that are usually considered includes the labor cost, overhead variable cost and the cost of materials.
- The next method used in calculating total variable cost is by adding together all the variable costs that is required to produce one unit of each product to get the total variable cost.
- The last method as indicated above is by multiplying the variable costs for each of the unit of the product by the exact total of the units produced. Whatever you get from this calculation will give you the total variable cost.
After knowing how to calculate a TVC just know that before you actually start the process, you just be able to know about the common costs and factors to consider when determining the variable cost.
The factors include; the equipment used in production such as the software and programs, wages for employees, commissions gotten from sales, cost of packaging, cost of the shipment, materials used in production and fees for transaction.
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Total Variable Cost Example
Below is a very concise example of how a business can find the TVC. XYZ business is trying to find the TVC that is required to produce about 200 of Its products.
If you want to calculate the total variable cost, you must first determine the variable cost per unit of each of the product that has been produced. The numbers gotten for each cost is listed below
- Labor cost per unit: $20
- Shipment cost per unit: $10
- Overhead cost per unit: $5
So from these numbers, the variable cost to produce one unit is $20+$10+$5= $35.This implies that the business needs $35 to make one product.
To find the TVC by using the formula Total output quantity × Variable cost of each unit gotten from the output = TVC
Using the values gotten and substituting them into the formula is 200×35 = 7000. So this tells us that the total variable cost that is required to produce 200 units is $7000.
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Importance Of Total Variable Cost
Knowing about the total variable cost of any business and company is very important and there are several reasons attached to it. Knowing about it alone can play a very big role in your decision making process.
An example is if your business is very low on cash, having knowledge on the kind of cost that must be covered regardless of the condition of the business will help you prepare better whenever you’re planning on how to deal with the variable costs.
In another way, knowing about the TVC will enable you cut down on the costs by working according to budget especially in areas where it is needed through the reduction of production. Below are the reasons why TVC is important;
- It helps business use strategic planning
- It enables businesses to determine their even break analysis
- It gives business the knowledge of knowing where to cut down costs that are related to production
- It brings forth a basis of determining businesses with their projection of profits
- It allows the company to handle shortcomings varying to operating conditions
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Difference Between Total Variable Cost And Average Variable Cost
The average variable cost uses a different method that tells you of the amount on average it costs to produce just a single product unit. You can call it the variable cost per unit. Unlike the TVC; the average variable cost uses the TVC to find the average of the variable cost for a number of different products.
This average variable cost is mostly used when calculating the variable cost per products especially in cases where there are different products that vary according to costs per unit.
In essence, to find the average variable cost, you need to determine the variable cost of each unit that has been analyzed and finally, you need to calculate the mean of those costs.
While similar, the total variable cost of the production of a businessis likened to the total of the amount of cost to produce a single unit of product. The number gotten can be gotten by multiplying the total cost to produce a unit by the number of the products produced in total.
Although the TVC and average variable cost seem like they are different, they still fall under the only types of variable costs.
ALSO CHECK: PRODUCT COST: Definition Examples, Formula and Calculation
Conclusion
Total variable cost as seen from this article is the main component of every business as it controls the loss and it also controls the profit gained from it. Having knowledge on this knowledge will help you analyze your cost properly and yield some profits.
FAQs
How Do You Calculate Total Variable Cost Using A Calculator?
Calculating a total variable cost by using a calculator is no less different from substituting the values into the formula and using the calculator to solve it. Using the calculator actually makes it very easy to do the multiplication and addition and asides that, it also saves time.
What Is The Meaning Of Total Cost?
Total cost is all the cost of expenses that incurred in the production process. It is also known as the sum of the total fixed cost and the total variable cost.
What Are Variable Costs?
Variable Costs can be referred to as those costs that vary with the output quantity produces in a period of time. This means that as the output increases, so does the variable cost increase. Total variable cost and average variable cost are the two types of variable cost.
When Does A Total Variable Cost Increase?
A total variable cost increases when output rises which could be at the beginning of production in most cases and when the output rises, the total variable cost becomes visible and it increases.
