Variable Costing Formula

Variable Costing Formula (Table of Contents)

Variable Costing Formula
Examples of Variable Costing Formula (With Excel Template)
Variable Costing Formula Calculator

Variable costing is the expense that changes in proportion with production output. We can say that expenses depend on the output with a change in the output of production input expense change. If variable cost increases, production output also increases and if variable cost decreases, product output also decreases. Total variable cost is equal to the quantity of output into variable cost per unit of output. It can be expressed as:-

The main element of the variable costing formula is direct labor cost, direct material, and variable manufacturing overhead. Fixed manufacturing cost is not included because variable costing makes the cost of goods sold solely available.

Examples of Variable Costing Formula (With Excel Template)

Now, let us take an example to understand Variable Costing formula in a better manner.

You can download this Variable Costing Formula Excel Template here – Variable Costing Formula Excel Template

Variable Costing Formula – Example #1

A company produces 1000 boxes at an average cost of production of one unit is $20.

The total variable cost of boxes will be:-

Total Variable Cost = Quantity of Output * Variable Cost Per Unit of Output

Put the values in the above formula.

Total Variable Cost = 1000 * 20
Total Variable Cost = $20,000

So, total variable cost of 1000 boxes is $20,000.

Total expense done in business is the sum of variable cost and fixed cost where fixed cost is fixed irrespective of quantity manufacture or produced whereas variable cost depends on quantity produced.

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Now, let us see one more example to calculate the total variable cost and its dependency on quantity.

Variable Costing Formula – Example #2

A company manufactures plastic bags, the raw material cost for production of 1 bag is $2, labor cost for manufacturing of 1 plastic bag is $10 and fixed cost of the company is $200. Now, we will calculate the variable cost and total cost.

To calculate Cost of Raw Material-

Raw material costs per unit will multiple with the total quantity of plastic bag manufactured.

To calculate Cost of labor –

Labor costs per unit will multiple with the total quantity of plastic bag manufactured.

Total variable cost is the sum of labor cost and cost of raw material.

Fixed cost is $200 irrespective of quantity.

Total cost is sum of fixed cost and variable cost.

Total variable cost is calculated by multiplying the quantity of output into variable cost per unit of output as variable cost depends on the quantity of production which will result in total variable costing of a product. Total variable cost is variable as it depends on the quantity of the product.

Hence,

Total Variable Cost = Quantity of Output * Variable cost per unit of output

Variable Cost Per Unit Formula

Variable cost per unit is the cost of one unit of production but it includes only variable cost not fixed one. It is said variable cost per unit because it depends on the quantity of production. Variable cost per unit is the sum of labor cost per unit, direct material per unit and direct overhead per unit.

It can be expressed as:-

Labor cost is taken as labor cost per unit as it depends on the quantity of production.
Direct material is the raw material cost per unit as it depends on the quantity of production. We can say that it is directly proportional to the variable cost.
Direct overhead is another extra cost required for the production of one unit it is variable as it depends on the quantity of production.

Variable Cost Per Unit Formula Example

Let’s see an example to understand Variable cost per unit better.

A company named Nile Pvt. Ltd produces handmade soaps, cost of raw material per unit is $5, the labor cost of production per unit is $7, fixed cost for a month is $500, overhead cost per unit is $1 and salary for office and sales staff is $3,000. Total Production done by the company in one month is 5,000 now we will calculate the cost of soap per unit.

Variable Cost Per Unit is calculated as:

Variable Cost Per Unit = Labor Cost Per Unit + Direct Material Per Unit + Direct Overhead per Unit

Put a value in the above formula.

Variable Cost Per Unit = 7 + 5 + 1
Variable Cost Per Unit = $13

Total Variable Cost is calculated as:

Total Variable Cost = Quantity * Variable Cost Per Unit

Total Variable Cost = 5000 * 13
Total Variable Cost= $65,000

So, variable cost per unit of soap is $13 and total variable cost of soap is $65,000.

Average Variable Cost & Formula

Average variable cost is the sum of all product’s total variable cost divided by the total number of unit produced by different products.

It helps to determine the average cost of production of a single unit of product in a company irrespective of a type of product.

Average Variable Cost Formula Example

A company manufactures plastic boxes and plastic balls. Variable cost per unit of plastic boxes is $8 and 10,000 boxes are manufactured by the company. Variable cost per unit of plastic balls is $5 and 15,000 boxes are manufactured by the company.

As we know,

Average Variable Cost = (Total Variable Cost of Ball + Total Variable Cost of Plastic Boxes) / Total Number of Balls and Boxes

Put the value in the above Average Variable Cost formula.

Average Variable Cost = (8 * 10,000) + (5 * 15,000) / 10,000 + 15,000
Average Variable Cost = $6.2

So, the average variable cost of plastic balls and boxes is $6.2.

Variable Costing in a Break-even Analysis

The break-even analysis is a vital application of variable costing. It helps to find the amount of revenue or the units required to cover the total costs of the product. Break-even points in units are fixed cost divided by sales price per unit minus variable cost per unit. The formula can be written as:-

Break-even Analysis Formula Example

A company produces mugs has a fixed cost of $1,500, variable cost per unit of $20 and sales price per unit is $30, now we have to calculate break-even point of same.

As we know,

Break-even Points in Units = Fixed Cost / (Sales Price Per Unit – Variable Cost Per Unit)

Put the value in the formula.

Break-even Points in Units = 1,500 /(30-20)
Break-even Points in Units = 150 Units

So, the company needs to sell 150 units of mugs to make the profit.

Significance and Uses of Variable Costing Formula

There are many uses of variable costing formula they are as follows:-

Variable Costing Formula helps in profit planning and margin set-up.
Variable Costing Formula is a major tool for cost control and a flexible budget.
Variable Costing plays a vital role in decision making.
Variable Costing Formula helps to decide the price of a product.
Variable Costing Formula helps to determine break-even point.