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The collective amount of variable cost related to the total cost of goods or services sold in a period is called total variable cost. The total variable cost has fixed costs and variable costs as its components. Total variable cost is the primary key of a company to analyse profitability. To calculate the total variable cost, identify all the factors, including the labour hours required per unit production. This material is associated with the product and estimates their cost per unit production, other variable costs, and their cost per unit production. Adding all these factors of the good and service production per-unit cost will make the total variable cost per unit.
Total variable cost= total output quantity produced X variable cost of output per unit is the total variable cost formula.
Components of Total Variable cost.
Variable cost changes as the changes happen in the production quantity of the goods and services; variable cost is the marginal cost of all the units produced like the labour, electricity, etc. Variable cost is always fluctuating depending upon the output production. If the production increases, then the number of raw materials required also increases. Similarly, if the output production goes down, then the number of raw materials required decreases.
Fixed cost does not change with the increase or decrease in the number of goods or services produced; for example, if a company is paying rent of 30,000 rupees every month, it will remain the same even after the increase or decrease in the output production.
What is the average fixed cost?
The fixed cost of the per-unit output production is called the average fixed cost. As the production of the total number of products increases, the average fixed cost decreases—Average Variable cost + Average Fixed cost= Average Total cost(AVC+AFC=ATC). The fixed cost of production divided by the quantity of output produced is the average fixed cost.
What is the average variable cost?
The average variable cost is the company’s input variable cost divided by the output produced. The average total cost or unit cost is divided by the quantity of output produced.
The average variable cost formula is average variable cost =variable cost/quantity (AVC=VC/Q). A business or company has to shut down if the output cost is below the average variable cost at the profit-maximising level of the output production.
Marginal cost.
Marginal cost includes all costs that come with making the additional change to produce one more unit of output production. The change in total cost when the additional output is produced in the short run, and some costs are fixed called short-run marginal cost. The long-run marginal cost is described with the length of time in which the input is fixed, including building size and machinery, which can be chosen according to the desired quantity.
The concept of marginal cost plays an important role in business management economics. It is referred to as the incremental cost of adding one more unit of production, like producing one more unit of goods and services for the customer. The marginal cost is calculated by dividing the change in costs by the change in quantity.
Relation between fixed cost and variable cost to the marginal cost.
Fixed costs and variable costs also affect the marginal cost of production if the variable cost of production exists. Individually fixed cost does not affect the marginal cost since the fixed cost does not typically change with additional units. However, variable costs tend to increase with expanded variables, adding to the marginal cost because of the law of diminishing marginal returns.
Conclusion.
The aggregate amount of variable cost related to the total cost of goods or services sold in a period of time is called total variable cost. The formula to calculate the total variable cost is- Total variable cost = total output quantity produced X variable cost of output per unit.
Total variable cost is the main key of a company to analyse profitability. The total variable cost has components fixed costs and variable costs. Variable cost is always fluctuating depending upon the output production. If the output production increases, then the number of raw materials required also increases similarly if the output production goes down, then the number of raw materials required decreases. Fixed cost does not change with the increase or decrease in the number of goods or services produced.
