Semi-variable cost formulaĪ semi-variable cost is one where the cost is partly fixed, and partly variable. If the price falls below the AVC, then the firm is no longer covering variable or fixed costs, and the business should stop production and simply pay fixed costs. If the price charged to the customer is above the AVC, then the business is likely to make a profit. The formula for calculating average variable cost is:īusinesses can use average variable costs to understand if they’re making a profit on their activities. The average variable cost (AVC) is a way of measuring the total variable cost per unit sold. “Businesses should be using variable costs to predict what happens to their gross profit margin if sales increase or fall by 20%, or if one of those costs increases dramatically,” he says. Laurie explains that the value in tracking variable costs is that it allows you to see your gross profit margin, and to protect that margin in the event that variable costs change. “We use Google Spreadsheets with custom calculators that constantly look at cost data to model what that means for our overall financial position.” “We can use our knowledge of variable costs to look at what happens if a supplier increases the cost of an item by 5%, or if the cost of shipping increases by 20% to a particular location,” he says. Understanding the variable cost formula is useful for companies like Go Swag because it helps with forecasting, says McKenna. If the company produces 100,000 Christmas trees each year, then the total variable cost would be 100,000 x 45, or £4.5 million. Using the variable cost formula, the company could work out that it costs £45 to produce a single Christmas tree, including labour, materials, packaging and distribution. Variable cost = variable cost per unit x total number of unitsįor example, if a company manufactures Christmas trees, the variable costs might include: However, in general, a company can calculate variable costs by multiplying the variable costs attributed to producing one unit of a particular product by the total number of products produced. There’s no single formula for calculating variable costs. The third category of Go Swag's variable costs is marketing and sales spend, “which will vary depending on the vertical we’re targeting, and the varied cost of acquisition and conversion”, says McKenna. Second, the company must pay for shipping, which can include fuel surcharges and border handling fees. First, there is cost of goods – the physical cost of buying inventory, which is branded and put into gift bags. A professional services firm like a marketing agency could find its variable costs include professional fees and software licenses.Īt Go Swag, the company’s variable costs are broadly divided into three categories, says Conor McKenna, the company's founder and CEO. The types of variable costs incurred by businesses will vary depending on the nature and industry of the business, explains Laurie. In contrast, if the pen manufacturer scales up production, it could expect to spend more on raw materials and sub-contracted labour. These fixed costs would include the cost of the machinery to make the pens, or factory rental costs. As Simon Laurie, a senior manager for outsourced business with accounting firm McBrides, puts it: "If your company makes pens, then you will have certain costs that are fixed, whether you’re making 50 pens or 50,000.” Variable costs vs fixed costsįixed costs are those costs that the business must pay regardless of how many products are made and sold. The easiest way to determine if a cost is variable, therefore, is to work out if the cost changes in line with output. If sales or production fall, then those costs will also fall. As your sales increase, variable costs will increase. What is a variable cost?Ī variable cost is any business expense that is directly correlated to your company’s production or sales. Read on to learn why tracking variable costs is so important to your business, and all you need to know to do so. This means there are lots of different potential fluctuations in variable costs every day. Go Swag offers the option to custom-build gift bag contents and packaging, which results in hundreds of potential configurations of items, packages, and shipping destinations. For Go Swag, a Glasgow-based business that supplies branded employee gifts, keeping a close eye on expenses that rise and fall with production and sales – known as variable costs – is critical.
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