Variable Cost per Unit
A business has costs which are classified as shown below.
- Direct Labor 40,000 – variable
- Utilities 22,000 – 80% variable
- Materials 35,000 – variable
Total Variable Costs
The total variable costs of the business are calculated as follows.
Variable cost = Direct labor + 80% Utilities + Materials Variable cost = 40,00 + 80% x 22,000 + 35,000 Variable cost = 92,600
Variable Cost per Unit
If the number of units produced in the period is 1,000 then the variable cost per unit is calculated as follows.
Variable cost/unit = Variable cost / Number of units Variable cost/unit = 92,600 / 1,000 Variable cost/unit = 92.60
Expected Variable Costs
If in the next period the number of units produced is expected to be 1,200 then the expected variable cost is calculated as follows.
Variable cost = Units x Variable cost per unit Variable cost = 1,200 x 92.60 Variable cost = 111,120
The unit variable cost remains at 92.60 but the total variable cost is expected to rise form 92,600 to 111,120.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.