Total Cost Formula

Total Cost Formula (Table of Contents)

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What is Total Cost Formula?

The term “total cost” refers to the overall cost of production that involves both fixed and variable components of cost. The formula for total cost can be derived by adding the total fixed cost to the total variable cost. by the number of goods produced. Mathematically, it is represented as,

However, the total variable cost can be further expanded into a product of a number of units produced an average variable cost per unit as shown below.

Total Variable Cost = Average Variable Cost Per Unit * Quantity of Units Produced

Therefore, the formula for total cost can be represented as shown below.

Examples of Total Cost Formula (With Excel Template)

Let’s take an example to understand the calculation of Total Cost in a better manner.

Total Cost Formula – Example #1

Let us take the example of SDF Ltd which is a company engaged in the manufacturing of auto parts components. During a recent internal cost audit, the accounts department informed that the total fixed cost of production for the company is $10,000 per month while the average variable cost per unit is $5. Based on the given information, Calculate the total cost of production for the company when the quantity of monthly production is:

1. 2,000 units
2. 3,000 units
3. 5,000 units

For 2,000 Units

Total Cost of Production is calculated using the formula given below

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

• Total Cost = $10,000 + $5 * $2,000
• Total Cost = $20,000

For 3,000 Units

Total Cost of Production is calculated using the formula given below

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

• Total Cost = $10,000 + $5 * $3,000
• Total Cost = $25,000

For 5,000 Units

Total Cost of Production is calculated using the formula given below

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

• Total Cost = $10,000 + $5 * $5,000
• Total Cost = $35,000

In this example, it can be seen that the total cost of production is directly proportional to the level of production.

Total Cost Formula – Example #2

Let us take another example where the depreciation cost and rental expenses are $15,000 and $5,000 respectively. On the other hand, the raw material costs and labour costs of production per unit $4 and $2 per unit. Based on the given information, Calculate the total cost of production when the quantity of production is:

• 1,000 units
• 1,500 units
• 3,000 units

For 1,000 Units

Total Fixed Cost is calculated using the formula given below

Total Fixed Cost = Depreciation Cost + Rental Expense

• Total Fixed Cost = $15,000 + $5,000
• Total Fixed Cost = $20,000

Average Variable Cost Per Unit is calculated using the formula given below

Average Variable Cost Per Unit = Raw Material Cost Per Unit + Labour Cost Per Unit

• Average Variable Cost Per Unit = $4 + $2
• Average Variable Cost Per Unit = $6

Total Cost of Production is calculated using the formula given below

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

• Total Cost = $20,000 + $6 * $1,000
• Total Cost = $26,000

For 1,500 Units

Total Cost of Production is calculated using the formula given below

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

• Total Cost = $20,000 + $6 * $1,500
• Total Cost = $29,000

Quantity of units produced = 3,000

Total Cost of Production is calculated using the formula given below

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

• Total Cost = $20,000 + $6 * $3,000
• Total Cost = $38,000

Explanation

The formula for total cost can be derived by using the following five steps:

Step 1: Firstly, determine the cost of production which is fixed in nature i.e. that cost which do not change with the change in the level of production. Some examples of the fixed cost of production are selling expense, rent expense, depreciation cost, etc.

Step 2: Next, determine the average variable cost per unit for those expenses which are dependent on the level of production. Some examples of the variable cost of production are labour cost, raw material cost, etc.

Step 3: Next, determine the level of production or the number of units produced.

Step 4: Finally, the formula for total cost can be derived by adding the product of average variable cost per unit (step 2) and quantity of units produced (step 3) with the total fixed cost of production (step 1) as shown below.

Total Cost = Total Fixed Cost + Average Variable Cost Per Unit * Quantity of Units Produced

Relevance and Uses of Total Cost Formula

The concept of the total cost of production is very important to understand from the perspective of production managers because it helps in the assessment of overall profit margin at a different level of production. Principally, the total fixed cost is not expected to change over a shorter period of period and so the total cost of production is primarily driven by the change in average variable cost per unit. Nevertheless, the total fixed cost is also equally important because it is the sum of total fixed cost and total variable cost which when deducted from the revenue will give the company profit. As such, the formula for total cost is very useful for all business.

Total Cost Formula Calculator

You can use the following Total Cost Calculator

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