You now know about variable costs and how important it is to keep accurate track of them. You also know how to use the formulas to calculate your variable costs in https://simple-accounting.org/virtual-accounting-making-the-switch/ Google Sheets. The more detailed and accurate your expense records, the better you’ll be able to split your costs into the fixed components and the variable ones.

Along the manufacturing process, there are specific items that are usually variable costs. For the examples of these variable costs below, consider the manufacturing and distribution processes for a major athletic apparel producer. Both Small Business Accounting 101: 12 Steps for Basics and Setup 2023 variable and fixed costs are essential to getting a complete picture of how much it costs to produce an item — and how much profit remains after each sale. It is important to note that fixed costs are not constant in the long run.

Average Total Cost Formula

This effect can be related to materials, labor, and sales commissions. For example, if you produce spark plugs, the copper used in production is a variable cost. This means if you stop producing spark plugs, you would no longer have the cost of copper. Additionally, regardless of how many spark plugs you produce, the price of copper for one spark plug remains unchanged. Examples of variable costs include sales commissions, direct labor costs, the cost of raw materials used in production, and utility costs.

• The variable costs do not increase or decrease according to the activities of any company but rather according to the inputs and outputs of the production.
• Fixed costs, on the other hand, are more stable, and you often have less control over them.
• Then factor in all the tacos you sold throughout the month — 1,000 tacos.
• But if sales are through the roof, variable costs will rise drastically.
• Meanwhile, the average variable cost is a different calculation that shows you the average cost to produce a single unit of a product by utilizing the total variable cost.

Fixed costs will stay relatively the same, whether your company is doing extremely well or enduring hard times. Think of them as what you’re required to pay, even if you sell zero products or services. Fixed costs remain constant regardless of production output, while variable costs fluctuate based on production levels. Fixed costs, such as rent, employee salaries, insurance, and office supplies, must be paid regardless of product volume. Fixed costs are considered long-term costs and are independent of production changes.

Required

The following exercise is designed to help students apply their knowledge of variable cost and its formula in a real-life scenario. Commissions are often a percentage of sales proceeds awarded as additional compensation. The amount of commission varies (i.e., is variable) based on the specific sales targets or criteria that salespeople must meet. Variable costs are often considered short-term costs as they can be quickly adjusted. For instance, if a company faces cashflow issues, it may promptly modify production to avoid incurring these costs.

Suppose you want to find out the cost to produce each unit of a product. Then, you can use the average total cost per unit formula, which calculates the total cost per unit. It will, of course, depend on your business, financial flexibility, and customer appetite.