Variable costs are costs whose total amount increases in proportion to the amount of production. When the amount of production increases in a certain activity range, and when the amount of production decreases, the total amount decreases in proportion to the production amount. However, the amount per unit remains constant. But there are general production costs too. These are material expenses, direct labor expenses, energy are all examples of variable expenses. So, what is a variable cost? Let’s find out more.
Although many people accept it to be constant per unit, they also see it as the increasing number of goods or services. These expenses show a linear, sometimes increasing, sometimes only decreasing trend per unit of production. The variable costs show a linear trend in management accounting analysis.
How to Find Variable Cost
Variable costs; direct raw materials and supplies, It consists of direct labor and variable general production expenses. In enterprises with an advanced degree of automation, variable costs consist of direct raw material and material expenses and variable overhead costs. First of all this method separates the general production expenses as fixed and variable. It is effective in planning, determining product prices, determining break-even points, analyzing the results of business activities, and making management decisions.
Also, the effect of variable costs has a great impact on decision-making. Any inaccuracies that may be subject to it also go away. The disadvantage of the method is that it is tough for a business to separate fixed and variable overhead costs. This sometimes causes errors in the classification of semi-variable expenses.
How to Calculate the Total Variable Cost
Total cost is an economic measure that adds up all the expenses paid to:
- manufacture a product,
- purchase an investment,
- acquire a team,
- and includes cash outlays and the opportunity cost of their choice.
Unlike cost accounting, the total cost in economics includes the total opportunity cost of each production factor as part of fixed or variable costs.
Total cost means the total economic cost of production. It consists of a variable cost that varies according to the number of goods produced. Also, it consists of including labor and raw materials. The rate of change in total cost as the quantity produced changes is called marginal cost. Experts also call it the variable cost of the marginal unit. Understanding the classification of your costs is crucial for calculation. Understanding the difference between variable costs and other costs allows you to classify costs better. These are categorizing costs.
After completing the classification process, add all variable costs for a given period. After determining the total variable cost for the last year, you need to divide the variable costs by the production volume. The product will yield variable costs.
Briefly: The total cost (TC) of a business is the sum of total variable costs (CVT) and total fixed costs (CFT). Thus CT = CFT + CVT
FAQ About Variable Cost
They are costs that vary depending on the total production amount.
The cost arising from the direct transfer. These are related expenses such as direct material and direct labor. This is for the costs of the product or service produced and the transfer of the remaining indirect expenses directly to the period’s profit and loss account.
Semi-variable costs; Some of them are fixed costs, some of them are variable. The variable parts of the semi-variable costs increase with the activity volume.
It is the one with the concepts of mixed cost, the variable cost, and fixed cost. Variable cost changes with production.
Variable expenses are material and labor costs that vary in proportion to the amount of production.
Conclusion About Variable Cost
Variable Cost Method is a cost method based on the principle of loading the costs of products. It varies only in line with production and sales volume. In this method, all fixed expenses are a period expense, not a cost element. Thus, fixed expenses are not included in the costs of semi-finished or finished product stocks. They are deducted directly from the relevant period’s revenue. Finally, if you wish to calculate your variable cost, you can always use Excel to calculate these parameters.
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