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

social security wage base calculationdividend journal entriesindirect method of cash flowsprepare income statement from trial balancehow long before a debt is uncollectibledouble declining depreciation method formulamerchandising companies examplesdebit and credit accounts examplesis accounts payable a debit or creditcalculate payroll taxes for employerfederal withholding tax percentage 2014cost of goods soldsjob costing sheetif a company fails to record estimated bad debts expensesold merchandise on account journal entrywhat is variable cost in accountingunits of production depreciation calculatoraccounts receivable journal entry examplecalculate the contribution margin ratiosalary is direct or indirect expensefica employer ratedirect write off method gaapadjusting inventory journal entrynotes receivablesallowance for doubtful accounts adjusting entrydefine manufacturing overheadcost allocation baseexample merchhow to gross up wages calculatorwhich journal would adjusting entries be foundcalculate relevant costcalculate payroll taxes 2014aging of receivables methodfederal unemployment calculatorjournal entry for invoiceyear end accrual entriescalculate federal withholdingexample of cogstennessee tax calculator payrollhow to prepare a contribution format income statementcash book with cash and bank columnscosting methods for inventoryfixed asset depreciation calculatorjob order costing managerial accountingbad debts entry in balance sheetbond valuation financial calculatorbond discount amortization schedulewhat is the normal balance of allowance for doubtful accountswhich columns of the accounting worksheet show unadjusted amountsdoubtful accounts journal entryhow to calculate variable expensehow to fill out profit and loss statementdifference between perpetual and physical inventoryvariable ratio examplesaging of receivables schedulepercent variance calculatorcontribution margin calculatorcalculate net pay after taxcalculate total asset turnoverdefine cash accountingbasic managerial accounting conceptshow to calculate labour rate per hourthe year we disappeared summaryaccounting ajefair value adjustment journal entrycogs unitsoverhead cost definitionwho pays federal unemployment taxexamples of cash flow statements indirect methodsample retained earnings statementaccounting trial balance definitioncheckbook register definitionoperating profit to sales ratiohow to determine overhead costaging of accounts receivable method formulaperiodic inventory journal entriesvariable costing versus absorption costing