To calculate variable cost, you need to identify all costs that change with the level of production. Variable costs include expenses like raw materials, direct labor, and any other costs that increase or decrease as production levels fluctuate. To find the total variable cost, simply add up all these individual costs over a specific period.
For example, if you produce 1,000 units and the cost of raw materials is $2,000, and direct labor is $1,000, your total variable cost would be:
Total Variable Cost = Cost of Raw Materials + Cost of Direct Labor
Total Variable Cost = $2,000 + $1,000 = $3,000
To calculate average variable cost (AVC), you divide the total variable cost by the number of units produced. This gives you an idea of how much variable cost is associated with each unit of production. The formula is:
Average Variable Cost (AVC) = Total Variable Cost / Number of Units Produced
Using the previous example, if you produced 1,000 units and your total variable cost was $3,000, your average variable cost would be:
Average Variable Cost = $3,000 / 1,000 units = $3 per unit
So, in summary, the key steps are to calculate total variable costs by adding up all variable expenses and then divide that total by the quantity of output to find the average variable cost per unit.