How to Find Variable Cost With Fixed Cost
Understand and calculate your variable costs by leveraging fixed cost data. Gain clarity on expenses for informed business decisions.
Understanding business costs is fundamental for informed financial decisions and long-term health. Businesses incur expenses to operate, produce goods, and deliver services, and categorizing these costs provides clarity for budgeting, pricing, and profitability analysis. Differentiating between constant and fluctuating expenses offers significant insight. This article explores how to identify and calculate variable costs, especially when fixed costs are known, providing a clearer picture of operational spending.
Defining Fixed and Variable Costs
Business expenses generally fall into two broad categories: fixed costs and variable costs. Fixed costs are expenses that do not change regardless of the volume of goods or services produced within a relevant range of activity. These costs are incurred even if a business produces nothing. Examples include monthly rent, annual insurance premiums, and administrative staff salaries.
In contrast, variable costs are expenses that change in direct proportion to the volume of goods or services produced. As production increases, total variable costs rise, and as production decreases, total variable costs fall. Raw materials, wages for production-line workers based on units, and shipping fees are common examples. The distinction between these two cost types is important because fixed costs represent a baseline expense, while variable costs fluctuate with operational activity, impacting profitability at different production levels. The sum of all fixed costs and total variable costs yields the total cost of operations for a given period.
Calculating Total Variable Cost
Once fixed and total costs are understood, determining the total variable cost for a period becomes straightforward. The primary method involves subtracting the known fixed costs from the total costs incurred. This relationship is expressed by the formula: Total Variable Cost = Total Cost – Fixed Cost. This calculation isolates the portion of expenses that directly changes with production volume.
For example, consider a small manufacturing company that reports a total cost of $50,000 for a particular month. If the company’s fixed costs, such as rent, insurance, and administrative salaries, amount to $20,000 for that same month, then the total variable cost would be $30,000. Identifying the total cost typically involves reviewing comprehensive expense reports or an income statement for a specific period.
Determining Per-Unit Variable Cost
Calculating the per-unit variable cost provides deeper insight into the cost structure of each product or service. If the total variable cost and the number of units produced are known, the per-unit variable cost is found by dividing the Total Variable Cost by the Number of Units Produced. For instance, if the total variable cost was $30,000 and 1,000 units were produced, the per-unit variable cost would be $30.
Alternatively, the per-unit variable cost can be determined by directly summing the variable expenses associated with each unit. This involves identifying the direct materials cost per unit, the direct labor cost per unit, and any other variable overhead applied per unit. Businesses might also use methods like the High-Low method to estimate the per-unit variable cost by analyzing changes in total costs.
Gathering the Necessary Information
Accurately calculating variable costs requires precise financial and operational data. Total cost information is typically found on income statements, also known as profit and loss statements, which summarize revenues and expenses over a specific accounting period. The general ledger, a detailed record of all financial transactions, provides a granular view of every expense, allowing for the identification of both fixed and variable components.
To pinpoint fixed costs, financial records such as property lease agreements, insurance policy documents, and payroll records for salaried employees are invaluable. Depreciation schedules for long-term assets also contribute to fixed costs. For variable costs and the number of units produced, operational data from production records, sales invoices, and inventory management systems are essential. Maintaining accurate and organized financial records is paramount, as the reliability of variable cost calculations directly depends on the integrity and completeness of the underlying data.