Total Variable Cost
Total Variable Cost (TVC) refers to the sum of all variable costs associated with producing a specific amount of goods or services. Variable costs change in direct proportion to the level of production or activity, meaning they increase as more units are produced and decrease as fewer units are produced.
The formula to calculate the Total Variable Cost is:
TVC = Variable Cost per Unit × Number of Units Produced
For instance, if the variable cost to produce a single unit of a product is $5 and you produce 100 units, the TVC is $5 x 100 = $500.
Variable costs might include:
- Direct materials: The raw materials used directly in the manufacturing of a product.
- Direct labor: Wages paid to workers who are directly involved in the production process.
- Manufacturing supplies: Items used up during the production process (e.g., lubricants for machines).
- Utility costs in a factory that vary with production volume, such as electricity for operating machinery.
Remember, fixed costs, like rent or a salaried manager’s pay, remain constant regardless of production levels and are not included in TVC.
Example of the Total Variable Cost
Let’s consider a fictional company, “ShoeFab,” that manufactures shoes.
Scenario:
ShoeFab’s primary variable costs are:
- Direct Materials: Cost of leather, laces, and other materials per pair of shoes.
- Direct Labor: Cost of wages paid to workers for producing each pair.
- Utility Costs: Electricity used in the manufacturing process, which varies with the number of shoes produced.
Here’s the breakdown of ShoeFab’s variable costs per pair of shoes:
- Direct Materials = $20
- Direct Labor = $10
- Utility Costs = $5
Total Variable Cost per pair = $20 + $10 + $5 = $35
If ShoeFab produces 1,000 pairs of shoes in a month, we can calculate the Total Variable Cost (TVC) for that month.
Using the formula:
TVC = Variable Cost per Unit × Number of Units Produced
TVC = $35 x 1,000
TVC = $35,000
Conclusion:
For the production of 1,000 pairs of shoes in that particular month, ShoeFab’s Total Variable Cost would be $35,000. If they were to produce more or fewer shoes in another month, the TVC would change accordingly, reflecting the variable nature of these costs.
