When thinking about cost behavior, think about how the cost behaves in total. A variable cost is a cost that varies in total. The cost increases or decreases based on a related activity.

The formula for total variable cost is:

Total Variable Cost = Variable Rate X Activity

Assume a constant rate

For planning and decision making purposes, we assume that the variable rate is constant. This allows for a single variable in the calculations. Only the activity will change. Now, that is not always the case, but as long as we are within the relevant range for our decision, we can assume that the rate will stay the same.

But isn’t it fixed if the rate stays the same?

Remember that a variable cost varies in total. The rate might stay the same but once you multiply the rate by varying levels of activity, the total variable cost will change.

Imagine that you are selling candy bars as a fundraiser for a club to which you belong. Your cost is 50 cents per candy bar and the club sells the candy bars for $1 each. If the club sells 200 candy bars, what is the total variable cost? Is it 50 cents? No, that is the cost of a single candy bar. If you sell 200, you would need to multiply that by 50 cents for each of the candy bars sold.

200 candy bars X 50 cents per candy bar = $100

What if the club sold 500 candy bars? The total variable cost would be $250.

Here is a graph of the total variable cost of candy bars for the fundraiser:

Total Variable Cost

Notice that if no candy bars are sold, there is no cost. The more candy bars that are sold, the higher the cost. The cost line is a straight line. The slope of the line is equal to the variable rate. For each additional unit sold, the line increases at a rate of 50 cents. Think of the formula of a line: y=mx + b, where y is your y coordinate, x is your x coordinate, m is the slope and b is the y-intercept (the point where the line hits the y-axis).

The formula for total variable cost is: y=mx. The y-intercept for a variable cost is always zero because if there is no activity, there is no cost. Therefore, the line will always start at 0,0. The slope of the line, m, is your variable rate. The activity is x. See your math teacher was right when he or she told you you would use this stuff someday!

Frequently, you will see textbooks show the formula for the slope of a line as the formula for cost equations.

Related Videos

Cost Behavior: Fixed, Variable, Step and Mixed 

Fixed and Variable costs as per unit and total costs

Share This:

Related pages

present value interest factor formulaweighted average cost inventory formulafiguring payroll taxesnet cash provided by operating activities formulasales return and allowanceallocation of overheadsdirect write off method for uncollectible accountsfixed cost per unit increases whenallowance for doubtful accounts adjusting entryprice to sales ratio interpretationfees earned debit or creditwhat is the difference between direct and indirect laborsocial security medicare tax calculatordirect write off method vs allowance methodjournal entry for ending inventorywip calculation formulaprior period adjustment journal entrywhat taxes should be withheld from paycheckdisposal of fixed assets in balance sheetwhat is beginning inventoryordinary annuity payment calculatorfair value journal entriesfinancial accounting journal entries examplestotal absorption costingfifo and lifo practice problemsreconciliations accountingallowance method for accounting for bad debtsdouble decliningis base pay gross or netordinary annuity calculator present valueprepare t accounts for manufacturing overhead and work in processwhat is fifo costingdouble declining balance depreciation method formulaunfavorable varianceasset turnover ratio meaningaje accountingdepreciation in trial balanceemployee medicare tax ratedepreciating assetsperpetual inventory journal entryclosing income summaryabsorption cost accountinghow to figure retained earningscost of goods sold for merchandising companyfica tax calculationhow to find total manufacturing overhead costcalculating average inventoryincome statement periodic inventory systemhow to calculate depreciation on straight line methodwhat is the direct labor hourly wage ratebreak even point and contribution marginreconciliations accountinghow do you calculate overhead ratecomputing overhead rategross margin per unit formulasalary accrual journal entrylifo methodformula to calculate weighted averageaccounting entries for purchasesfifo perpetual inventory methodwithholding tax entrypurpose of allowance for doubtful accountstrial balance of balancestake home pay calculator tnformula to calculate overhead costcalculate variable expensescogs journal entrywhen is the trial balance preparedus gaap accounts receivablerent prepaid journal entryhow to record bank overdraft in accountingadjusting trial balance examplecalculating straight line depreciationindirect costingtake home pay calculator florida hourlypayroll tax expense journal entryp&l income statementpv lump sum tablefica tax rate for 2014prepaid insurance on balance sheethow much is a premium bond worthowners equity is increased bytop side adjusting journal entry