Want to learn what is total cost formula? In this post, we deep dive into this accounting concept. We will look at total cost formula and examples.
Total cost formula
Total cost is the economic cost of production. It is the cost required to produce goods of some quantity. The total economic costs have two components the fixed costs and variable costs. The variable costs vary with the number of goods produced, includes raw material and labour. The fixed costs include costs that are unchanged in the short term like machinery and building costs. The total cost formula
TC = FC + VC
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Costs definitions
Cost is the most significant factor to determine success when you are operating a business. You need to understand different cost factors and how it affects profitability. We define costs as the value of money required to produce a product or deliver goods. In this section, we have explained different cost definitions.
Average variable cost
The average variable cost is the variable cost per unit. Analyze use the cost to determine if production should be temporarily shut. If you sell the products at a higher price than average variable cost and fixed costs, then your business can continue with the production.
If goods are sold at price lower than average variable costs, then you should shut down production, since the business is unable to meet the recovery costs. The average variable cost formula
Average variable cost AVC = Total Variable Cost / Quantity of goods
Average fixed cost
Average fixed cost is the fixed cost of production divided by the number of goods produced. Fixed costs are the costs incurred regardless of the volume of goods produced.
The average fixed cost formula
Average Fixed Cost (AFC) = FC/Q = ATC – AVC
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Total cost
Total costs are the cost incurred by a company to produce a certain quantity of goods. It is the sum of all fixed costs (cost of machinery, lease) and variable costs (cost of raw material and labor). Fixed costs are costs that are independent of goods produced. Variable costs changes with production. Total cost TC = AVC + AFC) X Quantity of goods
Total variable cost
Total variable cost is the aggregate of all the variable costs associated with the cost of selling in the period. We use total variable costs while analyzing profitability. The components of total variable costs are the costs related to production or sales volumes. In the service industry, labor costs are the biggest component of total variable costs. The total variable cost formula
Total Variable Cost = Variable cost per unit X Quantity of goods
Total fixed cost
Total fixed costs are an integral part of fixed costs. Total costs are the opportunity cost incurred in the short-run production that is not dependent on volume. You need to pay fixed costs as long as the business operates. Fixed costs are costs associated with capital. The total fixed cost formula
Total fixed cost = TC-TVS
Average total cost
The average total cost is the total fixed and variable cost divided by the total units produced. The average total cost is typically U-shaped, the graph decreases, bottoms out rises again. Average total cost is an important parameter to make business decisions related to pricing. The average total cost formula
TC = VC + FC
TC/Q = VC/Q+ FC/Q
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How to calculate the average variable cost?
Average variable cost will help you determine if you should temporarily stop your production. If the price received is greater than the average variable cost and fixed costs, production should continue. But you should shut down production when the price is lower than the sum of average variable costs and fixed costs. In this section, we discuss how to calculate average variable costs.
The average variable cost formula
The average variable cost formula is represented by
AVC = VC/Q
Where
AVC = Average variable cost
VC = Variable Costs
Q = quantity
We can calculate the average variable cost, from the total cost formula
AVC = ATC – AFC
Where
AVC = Average variable cost
ATC = Average total cost
AFC = Average fixed cost
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How to find average variable cost?
We obtain the average variable cost when we divide the variable costs by output. Average variable cost can be calculated from your company’s cost function. A cost function is a relationship between cost and quantity. We need to deduct fixed costs and divide them by Q. Here are how to find average variable costs.
Consider a company whose total cost formula is represented by
TC = 0.1Q3 – 2Q+60Q +200
We can convert the total cost function to function for average variable cost by
AVC = (TC –FC)/Q
AVC =0.1Q3 – 2Q+60Q +200 -200
AVC = 0.1Q2 – 2Q +60
The average variable cost curve is U-shaped. It declines initially but eventually rises.
How to calculate the average fixed cost?
Average fixed cost is the fixed costs to produce one unit of the product. Fixed costs remain unchanged with productions levels. Typical fixed costs are the salary of permanent employees, rent, mortgage payments, etc. We calculate average fixed costs by dividing the total fixed costs by the output level. In this section, we find out how to calculate the average fixed costs.
Average fixed cost formula
The average fixed cost remains unchanged with the number of goods or services produced. Companies recalculate their fixed costs periodically to ensure profitability. The average fixed cost formula
AFC = FC/Q
Where
FC = fixed costs
Q = Quantity
How to find average fixed cost?
Here is you find how to find the average fixed cost. There are two methods of average fixed costs are
Division method – To get the average costs of a product, we divided the total fixed costs by the production unit over a fixed period.
- We compute the fixed costs over a set period. Using a set period allows you to analyze when you are breaking even and earning a profit.
- Add all individual fixed costs to get total fixed costs.
- Obtain a quantity of goods period over the period.
- Divide total fixed costs by quantity.
Subtraction method – this method requires average total costs and average variable costs.
- The total cost of a business is adding costs involved in the production of a certain quality. The average total costs are the total cost divided by the quantity produced.
- Find average variable costs are calculating by dividing the total variable cost by the quantity produced.
- Subtract the average variable cost from average total costs.
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How to calculate the total cost?
The total cost is the combined fixed and variable costs for a batch of goods or services. The total cost is the cost of producing the specific level of output factoring in all the costs of production. It helps to determine business profitability. It helps you determine if you need to adjust pricing, reduce cost, and helps you identify diversifying opportunities. In this section, we discuss how to calculate total costs.
Total cost formula
The total cost formula is as follows –
Total Cost = Total Fixed Cost + Total Variable Cost
Where
Total Variable Cost = Average Variable Cost Per Unit * Quantity of Units Produced
Total cost = Total fixed cost + Average Variable Cost Per Unit * Quantity of Units Produced
How to find the total cost?
Here is how to find total costs. We need to find out the following.
- Fixed costs are also called overhead costs or the money required to operate. Fixed costs for business include rent, utilities, building lease, equipment, insurance premium, and salary of permanent employees.
- Variable costs are costs that change with the volume of goods produced. If the business manufacturers a high quantity of goods and services, the variable costs will be higher. Typical variable costs associated with the business are raw materials, shipping expenses, and labor costs.
- Add fixed and variable costs to find the total cost.
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How to calculate the total variable cost?
Total variable costs change with production volumes during any period. These costs are connected with business volume and will increase or decrease depending on how much is produced. To find total variable costs we add different components of variable costs or expenses related to production. In this section, we show how to how to calculate total variable costs?
The total variable cost formula
Total variable costs are calculated for a period. It is the sum of all the variable costs associated with each product you have developed. The total variable cost formula
Total variable cost = Total quantity x Variable cost per unit of output
How to find total variable cost?
To find the total variable cost you first need to identify all the variable costs associated with the specific production of the unit. This includes the cost of labor, material, and overhead costs. Add all of these costs together to get the total variable costs of a single unit. It is not difficult to get total variable costs.
Common variable costs for production
- Production equipment, such as software
- Employee or labor wages
- Sales commissions
- Raw material costs
- Research and development costs
- Packaging costs
- Shipment costs
- Transaction fees
- Production materials
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How to calculate the total fixed cost?
Fixed costs are your expenses that are not affected by business sales or production. Fixed costs are independent of business activity. It is also called overhead costs or indirect costs. Calculating your fixed costs is simple. All you need to add up all the fixed costs. In this section, we elaborate on how to calculate total fixed costs.
The total fixed cost formula
The total fixed cost is calculated over a short period like a month or six months.
Total fixed costs = F1+F2+F3+F4
or
Total Fixed Cost = Total Cost of Production – Variable Cost Per Unit * No. of Units Produced
How to find total fixed cost?
Here is how to find the total fixed cost. Fixed costs are periodic expenses tied to a schedule or contract. Fixed costs are not permanent but any changes will not be directly related to output.
Examples of fixed costs
- Rent/Mortgage
- Salaries
- Insurance
- Depreciation
- Taxes
- Interest
- Fees/Permits
Option1
Total Fixed Costs = F1+F2+F3+F4+…
Where Fn is independent of fixed costs
This option is suitable if you have a list of expenses. You need to determine the fixed costs accurately.
Option 2
Fixed Cost = Total Cost – (Variable Cost Per Unit * Units Produced)
If you know the variable costs of production per unit and total production costs, you can calculate the fixed costs.
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How to calculate the average total cost?
The average total cost is the per-unit cost of the number of products that are made. The average total costs include fixed and variable costs. Fixed costs are expenses that do not change with the number of goods produced. Variable costs are costs dependent on the number of goods or services produced. In this section, here is how to calculate average total costs.
The average total cost formula
The average total cost formula is as follows
Average total costs = Average fixed costs + Average variable costs
Where
Average fixed costs = Total fixed costs/quantity of units produced
Average variable costs = Total variable costs/quantity of units produced.
Alternatively
Average fixed costs = Total fixed costs/ quantity of units produced.
How to find the average total cost?
Here is how to find the average total cost.
- Identify fixed costs from the profit and loss account. It includes items rents, expenses, equipment costs, insurance, salaries, and utilities.
- Identify all the variable costs. It includes items like costs of raw materials, direct labor, sales commission, and delivery or shipping.
- Calculate the total cost of production
- Determine the units produced
- You can determine average fixed costs from the formula.
Also read: Economic profit – How to calculate economic profit
How to find the cost function?
Saving money is a vital part of the business. A small saving can add up considerably in a period. To begin a realistic saving plan, business leaders need to study the company’s spending patterns. Businesses costs can be broadly classified into fixed and variable costs. The cost function formula calculator helps businesses track expenses.
The cost function Cx = FCx + VCx
Where FC – fixed costs
VC = variable costs
Average cost function
The average cost is the cost per unit of producing a certain quantity. In accounting terms, we divide the sum of variable costs and fixed costs by the volume of goods produced. The average cost graph is typically U-shaped. Average cost starts high because of the low denominator. The graph gradually goes down before rising again.
Cx = (FCx +VCx)/X
Marginal cost function
The marginal cost function is derivative of the total cost function C(x). To find the marginal cost, derive the total cost function to find C’(x).
Marginal cost (Q) = dC/dQ
= ΔVC/ΔQ
Where,
Δ denotes an incremental change of one unit.
Marginal cost is not the cost of producing the next and last unit. In the short term increasing production requires more variable input, usually assumed to be labor. Adding more labor to a fixed capital cost reduces the marginal cost of labor.
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Total cost function
The total cost is the total production cost. It is the sum of total fixed costs and total variable costs. Once you have determined your production costs it will be easier to create a realistic budget. You can use the total cost function formula to determine the exact production cost of a fixed number of goods or services within the time frame.
Total cost function formula
C(x) = FC(x) + V(x)
Where,
FC = Fixed Costs
Vx = variable costs.
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Variable cost function
The variable cost is unpredictable. They can occur if your order volume has gone down. The variable cost function helps companies determine production volumes.
TVC = VC(x)
Total cost examples
Company ABC leases office space for $10,000 per month. They rent machinery for $5000 per month. It has a utility bill of $ 1000. Their fixed costs are $16,000 per month.
In terms of variable costs, the company produces 2000 widgets at $10 per unit. It pays $5000 overtime to its employees. The total variable costs are $20,000 (product costs) and $5000 labor costs. The variable costs are $25000.
The total costs formula = total costs of variable cost + total cost of fixed cost
= 16000+25000
Total costs = $41,000
Example 2
XYZ company has a fixed cost $10,000 and a variable cost of $3 per unit. The company produces 1000 units every month.
The total cost formula = total costs of variable cost + total cost of fixed cost
= 10000+3*1000
= 13000
Differentiate marginal cost and average variable cost
The difference between marginal cost and average variable cost is as follows –
Marginal costs |
Average variable cost |
It is the increase in the cost of production of one more unit product or services. Marginal costs changes with changes in quantity of production. | It is sum of total cost of goods divided by the number of goods |
Formula to calculate marginal cost = change in total costs/change in quantity | Average cost = Total costs/ number of goods |
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How to calculate variable cost per unit?
Every business operation has variable costs. These may differ depending on the nature of the business. Some variable costs are
- Direct labor
- Raw material
- Transactional fees
- Commission for sales
- Shipping
- Utilities
The variable cost formula = Total variable costs/ number of units produced.
How to find the total cost from marginal cost?
Marginal costs represent the extra costs that occur when you produce extra units of goods or services. We calculate marginal costs by computing the change in production costs divided by the change in the number of goods produced.
Marginal costs formula = change in costs/ change in quantity
The change in costs can increase or decrease with the volume change. Change in cost is calculating by deducting original production cost with new production costs. A change in quantity is the increase or decrease in production level.
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What are the economic costs of production?
In economics, the total cost is the total economic cost of production. It has two components the fixed costs and variable costs. Variable costs change according to the volume of goods or services being produced. Fixed costs are independent of the number of goods being produced. Economic costs are the cost of the decision. It depends on factors like the costs of the alternative chosen and the benefits.
Total cost in economics = fixed cost variable costs + opportunity costs
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