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


example accounting equationhow to write an income statementweighted average formula accountingwhat are retained earnings in quickbookscalculate the value of savings bondsadjusting journal entries practiceunearned revenues areoverhead calculation formulaadjusting entries affect the cash accountjournal entry for bank loan with interestaccounting trial balance definitionopening balance sheet adjustmentswriting off accounts receivablein computing depreciation salvage value iscost of good sold formula manufacturingformula for cost of good soldstatement of retained earnings exampledifferent types merchandisinghow to close cash dividends journal entrydefine reconciliatehow do you prepare a trial balancedefine indirect materialhow to calculate depreciation rate formulaformula for accounts receivablemanagerial accounting income statement exampleloan accounting journal entriesabc based costingpresent value of an annuityhow to find contribution marginexamples of reversing entrieswhat are the differences between managerial and financial accountingasset turnover ratio meaningaccounting inventory systemswhat is the difference between perpetual inventory and physical inventorywhat is discount allowed and discount receivedmanagerial accounting balance sheetnsf check journal entryhow to calculate depreciation with residual valuetake home pay calculator texas hourlypresent value table of annuitycost allocation of an intangible asset is referred to asjournal entry for accrualuncollectible accounts receivablegross method perpetual inventory systemcontribution margin income statement templatehow much fica does employer paytable of annuity factorsmerchandising companies definitionhow to calculate unit contribution marginformula for double declining balanceadjusting entries bad debt expensecash premium bondspresent value of annuity due of 1 tableending inventory formuladit feesfull absorption costing formulacontra assets accountaccrued interest entryaccrued revenue in balance sheettrial balance accounting definitiontn paycheck calculatorcontribution margin per direct labor hourperpetual accounting journal entriestrial balance account numbersadjusting entries for accrued salarieshow to calculate average inventorymachine hour rate calculationis salaries payable a current liabilityjournalizing adjusting entriesvariable expense per unit formulaapplesauce costhow is cogs calculated