Total variable cost is a measurement of the amount of costs that a company incurs as a result of production. These costs are known as variable costs because the cost will change depending upon the amount of items that the company must produce to satisfy orders. The equation for the total variable cost requires the amount of items being produced to be multiplied by the variable cost per unit. If the variable costs stay below the amount of money being paid for the product by consumers, the company will make a profit on the order.
There are two types of operational costs which should concern a company. Fixed costs, which generally relate to a company's overhead, stay the same regardless of the company's production schedule. Variable costs, on the other hand, are directly related to how much production a company undertakes. Costs of materials and labor will naturally rise as more production takes place, and drop as production slows. The total variable cost is a good way for a company to gauge its production costs.
To calculate the total variable cost, a company must first measure how much it takes to produce a single item. This is known as the cost per unit, and it can be calculated by dividing the amount of items produced into the cost of labor and materials to produce that amount. For example, if a company produces 100 specific items at a time and it costs them $200 US Dollars (USD) to produce those items, the cost per unit would by $200 USD divided by 100, or $2 USD per unit produced.
Once the cost per unit is calculated, the variable cost is easily reached. Since the variable costs are dependent on the amount of units produced, the cost per unit is multiplied by that amount to reach the variable costs for a particular order. Using the example above, imagine that the company is asked to produce 3,000 units for a specific order. The total variable cost for that production order would be 3,000 multiplied by $2 USD per unit, or $6,000 USD.
With this amount in mind, the company could then compare the total variable cost with the price it will receive for the 3,000 items. Ideally, a company can make profits that are consistent enough to cover not only the variable costs but also the fixed costs which it incurs every day. Companies that can reduce their variable costs while still demanding high prices are likely to have long-term financial success.
