There are two main cost categories: variable and fixed. A variable cost is one that changes with your level of output. An example is raw materials and packaging. (ref 1) You have to input more raw materials to get more output, and you have to buy more packaging to distribute your output. To determine your variable costs, you must add up each variable cost in your production. For the purposes of running a business, managers also need to know the variable cost per unit of each good produced.
Items you will need
- Pen or pencil
Make a list of your variable costs and choose a time period to calculate for. For simplicity's sake, assume you are managing a manufacturing plant that has only the variable costs of direct labor (plant workers), raw materials, and packaging materials. Additionally, assume that you are looking at the variable costs per month.
Calculate the price of each of your variable costs. What you paid for your variable costs are their prices. In the example, wages paid for direct labor are $1,000, packaging is $1,000, and raw materials are $1,000.
Add up each variable cost: $1,000 + $1,000 + $1,000 = $3,000 Your total variable cost for said month is $3,000. To calculate costs per unit, continue to step 4.
Divide the variable costs of the time period by the total number of products produced during the period. If you produced 10,000 products and each of your variable costs is $1,000, then $1,000/10,000 = .10. So, each of your variable costs in this example contributes 10 cents to every dollar of your total per-unit costs. In total, variable costs account for 30 cents of every dollar you spend or 30 percent.
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