Variable Cost per Unit Formula
The variable cost per unit is calculated by dividing the total variable costs of the business by the number of units.
Variable Cost Per Unit Example
To illustrate, suppose a business has costs which are classified as shown below.
- Direct Labor 40,000 – variable
- Utilities 22,000 – 80% variable
- Materials 35,000 – variable
Calculation of Total Variable Costs
Firstly the total variable costs of the business are calculated as follows.
Direct Labor 40,000 (100%) Utilities 22,000 (80%) Materials 35,000 (100%) Variable cost = Direct labor + 80% Utilities + Materials Variable cost = 40,00 + 80% x 22,000 + 35,000 Variable cost = 92,600
Calculation of Variable Cost Per Unit
Next the variable cost per unit is calculated.
If the number of units produced in the period is 1,000 then the variable cost per unit is calculated as follows.
Production level = 1,000 units Total variable cost = 92,600 Variable cost/unit = Variable cost / Number of units Variable cost/unit = 92,600 / 1,000 Variable cost/unit = 92.60
Calculation of Expected Variable Costs
Additionally the expected variable costs for a period can now be estimated using the variable cost per unit calculated above of 1,000.
To illustrate, suppose in the next period the number of units produced is expected to be 1,200. In this case the expected variable cost is calculated as follows.
Expected production = 1,200 units Variable cost per unit = 92.60 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 of the business is expected to rise from 92,600 to 111,120.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. 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 degree from Loughborough University.