We know that it’s easy to get stressed about spending money. So, it’s a fact of life as a business owner, especially when considering variable costs. Moreover, these costs increase with the number of units produced or sales made. Whether you’re thinking about customizing items to make your product more attractive or expanding the menu in your restaurant, the cost of marketing and sales can quickly spiral out of control. So, how much do you need to spend on advertising every month? How much to keep up with demand? The truth is that there’s no one size fits all answer for everything, but knowing some numbers and understanding why they’re important can help keep your business on track. So, here is a simple guide to variable cost by Yogi & Associates! Weel, we hope our effort will help you understand the whole process.
To answer all these questions that have confused you, Yogi & Associates are here for you to help you get to know the answers! If you don’t understand the concept of variable cost and why it’s important, that’s ok, you’re not alone. When we get calls from people looking to improve their business, they want to know: How much sales revenue is required to achieve financial success? Or what if I am unable to achieve that goal? So, our team at Yogi & Associates manages to clear your doubts and give you a basic understanding of how sales expenses work and where your money goes.
Introduction to Variable Cost:
1. What is a variable cost?
2. Importance of understanding variable cost:
3. How to calculate the variable cost?
4. What is the formula for variable cost?
5. Steps to calculate the variable cost:
6. Break-even analysis:
What is a variable cost?
Here is a simple guide to variable costs: Variable costs rise when sales go up and they fall when sales go down. The reverse is also true: variable costs fall when production goes down and they rise when production goes up. Moreover, variables rise and fall by the same percentage as sales and production volumes.
Variable costs are the expenses that a company incurs to create a certain amount of products or services. In simple words, variable costs entail many components, such as labor and materials, which help determine the final selling price for an item. For example, when your company needs to increase production volume and you must hire additional workers to complete an order before it sells out, your variable costs will rise.
Variable costs are the expenses that change based on how much you make and whether you sell products.
The following are some examples of common variable costs:
- Costs of labor
- Supplies of raw materials
- Essentials of machinery
- Costs of shipping
- Fees charged by credit cards on purchases made by customers
- Commissions on selling
Importance of Understanding Variable Costs:
- You can make informed decisions on the type of goods and services that your business produces, and what you purchase to keep your business running. So, you’ll understand variable costs better, allowing you to make more accurate decisions when buying goods or hiring people.
- Variable costs include the cost of materials and labor that can be either increased or decreased by altering production. Moreover, they are nominal but easily changed. Therefore, you will need to take into account fixed costs and then calculate your variable costs before you can determine your profit margin.
- Examining variable costs helps investors understand how well a company handles different operating conditions. In addition, you can use this information to identify areas of opportunity for cost reduction.
How to Calculate Variable Costs?
Calculating variable costs is an important part of understanding the operation of a business. Moreover, you can carefully assess the following with this information:
- What is the profit margin on the product or service?
- Whether or if you should keep making it?
- Where can you make changes to lower the variable expenses of that product or service?
- What is the best way to price your goods or services?
- Variable costs are computed by multiplying the cost per unit of output by the quantity of output.
What is the formula for variable cost?
The variable costs formula might look strange at first, but it is very simple to use! So, to calculate variable costs, you will take the amount it costs to make one unit of your product, and then multiply that by the total number of products you’ve created.
Total Variable Costs = Cost Per Unit x Total Number of Units.
Steps To Calculate Variable Costs:
Calculate your total variable cost with these 5 easy steps.
To calculate the total variable cost of producing one product or service, you must identify all costs related to production and add them together. There are five steps to take:
- First, learn about the 5 general elements of cost.
- Then identify each element related to production.
- Determine how much it costs for a particular type of commodity, product, or service.
- Next, add all variable costs until you have a total amount.
- Then multiply that amount by the number of units created by using the previous step.
For example, suppose you’re making a gadget and want to know how much it will cost to make 200 of them. So, the following variable expenses are involved with the production of each widget:
- $2.00 per gadget in labor costs
- $1.00 per gadget in material costs
- $0.50 per gadget in packaging costs
- $0.50 per gadget for shipping
- $0.50 per gadget for device upkeep
$2.00 + $1.00 + $0.50 + $0.50 + $0.50 = $3.50 per widget is the variable cost of production. This implies that each widget will cost $3.50 to produce.
The total number of widgets produced is 200.
Break-even analysis is a technique that helps you determine the volume of product or service required to cover variable costs. To do this, we’ll use the following equations:
Break-even point = fixed costs ÷ (revenue per unit – variable cost per unit)
Based on sales dollars:
Break-even point = fixed costs ÷ contribution margin
Contribution margin = product price – variable costs
The break-even analysis allows you to know if your business will break even or make a profit, so you can determine whether it’s worth continuing. So, to calculate the break-even point, you will need to know each of the costs involved in your current business, along with your target cost.
Whether you’re familiar with the concepts represented in this guide or not, watch this short video to quickly understand the main concepts covered in this guide, including what variable costs are, the common types of variable costs, and how break-even analysis works.
To learn about variable mortgage rates, you can go into our article by clicking Variable Mortgage Rate: Guide 2022!
Variable Cost: Bottom Line!
Variable costs are a critical component of any business. They can significantly impact your bottom line, but understanding them and how to manage them can help you scale and preserve profitability. How do you do this? With the right strategy and discipline, of course! So, Yogi & Associates has leading experts in value-added services. For example, we can help you understand your variable costs because they can significantly impact the profitability of your company. So, don’t hesitate to contact us because variable costs are a big deal for your business, and providers like Yogi & Associates can help you do a better job of managing them. Therefore, find out how on our website today, or give us a call to learn more.