Step 1: Firstly, determine the direct labor cost that can be directly apportioned to the production level. The computation of direct labor cost involves certain factors like labor rate, level of expertise our and number of hours employed for production. Step 2: Next, determine the cost of raw material required in the production process and its computation involves a type of material required, the amount of material used and the rate. Step 3: Next, determine the variable manufacturing overhead which all the remaining variable costs that can be directly assigned to the production process.
Step 4: Finally, the formula for total variable cost can be derived by adding direct labor cost step 1 , cost of raw material step 2 and variable manufacturing overhead step 3 as shown below.
It is important to understand the concept of total variable cost as it is usually by companies to determine the contribution margin of a product.
Since fixed costs are a type of sunk cost, a company should make sure that any order that they execute should at least cover the total variable cost so that they generate some cash inflow. Further, the total variable cost can also be applied to plan additional production units by improving efficiency or hiring contractual manpower in order to add to the bottom line of the company i.
It is essential to understand that since the total variable cost excludes fixed or absorption costs, profit will increase with volume if the additional revenue is higher than the incremental variable cost. This is a guide to Total Variable Cost Formula. Here we discuss how to calculate Total Variable Cost along with practical examples. We also provide a Total Variable Cost calculator with a downloadable excel template. These are the costs that shall change depending upon the output.
Variable costs shall increase as the output increases, and these shall decrease as the output decreases. We cannot control these costs as these remain fixed and will only incur whenever there is the production of goods. These costs help to determine the total production cost, an individual contribution from a given product, etc.
This article has been a guide to the Total Variable Cost and its definition. Here we discuss the formula to calculate total variable cost along with practical examples and downloadable excel sheet.
You can learn more about accounting from the following articles —. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.
Free Accounting Course. Login details for this Free course will be emailed to you. Forgot Password? Article by Madhuri Thakur. Definition of Total Variable Cost Total Variable Cost can be defined as sum total of all the variable costs that would change in the proportion to the output or the production of units and therefore helps in analyzing the overall costing and profitability of the company.
Below are the steps required to calculate — Identify the labor hours required per unit. In other words, the total expenses cost incurred, both explicit and implicit, on the resources to obtain a certain level of output is called the total cost. The total cost includes both the variable cost and the fixed cost. Total variable cost and is denoted by TVC symbol.
How to calculate Total Variable Cost using this online calculator? Calculator A to Z. Chandana P Dev. Mithila Muthamma PA.
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