# 3 Ways to Calculate Variable Costs

The costs associated with a business operation can be classified into two quite broad categories: variable and fixed. Variable costs are those that fluctuate according to the production volume, while fixed costs remain constant. Learning to classify costs is the first step in improving business management and efficiency. Knowing how to perform these calculations can help you lower the costs involved in producing each unit, making your business much more profitable.

## Steps

### Method 1 of 3: Calculating Variable Costs

#### Step 1. Classify your costs as fixed or variable

Fixed costs are those that remain constant even with changes in production volume. Rents and administrative salaries are examples of fixed costs. Whether you produce one or 10,000 units, these costs will remain roughly the same at the end of each month. Variable costs, in turn, change according to production volume. For example, raw materials, packaging and transport, and workers' wages are examples of variable costs. The more units you produce, the higher these costs will be.

• Once you understand the difference between fixed and variable costs, rank each of the costs associated with the business. Many of them, like the examples mentioned above, will be easily classifiable. Others can be a little more ambiguous.
• Some costs can be difficult to classify because they do not behave in a clearly fixed or variable way. For example, an employee may receive a fixed salary in addition to commission, which varies according to sales volume. These costs can be broken down into separate elements, either fixed or variable. In this case, only the employees' commission would be treated as a variable cost.

#### Step 2. Add up all the variable costs for a given period

After classifying all variable costs, add them up according to the period studied. For example, consider a simple production operation with only three variable costs: raw materials, packaging and transport, and finally workers' wages. The sum will represent the total variable cost.

### Método 2 de 3: Use o método de altos e baixos

#### Step 1. Understand mixed costs

Sometimes it is not so easy to categorize costs as fixed or variable. They can vary with production, but they are also needed even when there is no production or sales. These, in turn, are called mixed costs and can be broken down into fixed or variable components when measured and categorized.

• An example of a mixed cost is the salary expense for an employee who receives, in addition to salary, commissions on sales. The salary will be paid even when there was no sale, but commissions depend on the volume of sales made. In this example, the commission represents a variable cost and the maturity a fixed cost.
• A slightly more complicated example is utility costs. Electricity, water and gas need to be paid even if there has been no production. However, they can be used to a greater extent as part of the production process. Separating these costs between fixed and variable requires a more complex method.

#### Step 2. Measure activity and cost

To separate mixed costs into fixed and variable components, you can use the ups and downs method. He starts by taking the mixed costs of the highest and lowest production months and uses the difference to calculate the variable cost ratio. To begin, determine which months had the highest and lowest values ​​of activity (production). Write down this activity in a measurable way (such as the workload of the machines) as well as the mixed costs you want to measure monthly.

• For example, imagine that, as part of a production process, your company cuts metal parts with a water cutter. This requires the use of water, generating a variable cost that increases with increasing production. However, you will also have a water expense that arises from your factory's operation (drinking, toilets, etc.). Water costs, from this perspective, would be a mixed cost.

#### Step 4. Determine the variable cost

You can now use the found ratio to determine which of the mixed costs refers to variable costs. Multiply the proportion of variable costs by the amount of production and you will find this value. In this example, this would be equal to BRL0, 10×50,000{displaystyle BRL0,10\times 50,000}

ou R$5.000{displaystyle R\$5.000}

para o mês menos produtivo e R$0, 10×60.000{displaystyle R\$0, 10\times 60.000}

ou R$6.000{displaystyle R\$6.000}

para o mês mais produtivo. Eles representam os custos variáveis para cada mês. Você pode subtrair esse valor do custo mensal total para obter o custo fixo, que é igual a R$3.000 em ambos os casos. ### Método 3 de 3: Usando informações dos custos variáveis #### Step 1. Measure the company's profitability In most cases, increasing production will make each additional unit a little more profitable. This happens because fixed costs are distributed over a greater volume of production. For example, if a business capable of producing 500,000 units per year spends R$50,000 annually on rent, these costs are distributed at the value of R$0.10 per unit. If production doubles, it will be distributed at just R$0.05 per unit, allowing for a greater profit on each sale. Thus, as income increases, the cost of goods sold should also increase more slowly (since, ideally, the variable cost per unit remains constant and the fixed cost decreases).

• To determine whether or not variable costs stay constant, divide your total by income. This will give you an idea of ​​how much these variable costs represent. You can then compare this value to historical variable cost data to see if the value per unit increases or decreases.
• For example, if the total variable costs equals BRL 70,000 in one year and BRL 80,000 in the next, with an income of BRL 1,000,000 and BRL 1,150,000, respectively, you will see that the variable costs remained. stable during these two years at the rate of R$70,000÷R$1,000,000{displaystyle R\$70,000\div R\$1,000,000}

, ou 7%{displaystyle 7\%}

e R$80.000÷R$1.150.000{displaystyle R\$80.000\div R\$1.150.000}

ou 6, 96%{displaystyle 6, 96\%}

da renda.

#### Step 2. Use the variable cost ratio to assess risk

By comparing the percentage of variable costs per unit, you can determine the proportion of each type of expense. This can be calculated by dividing the variable costs per unit by the total cost per unit, with the formula vv+f{displaystyle {frac {v}{v+f}}}

, onde v e f são as variáveis por unidade e os custos fixos, respectivamente. Por exemplo, se os custos fixos por unidade forem R$0, 10 e os custos variáveis por unidade forem R$ 0, 40 (para um custo total por unidade de R$0, 50), isso quer dizer que 80% do custo da unidade equivale aos custos variáveis (R$0, 40/R$0, 50=0, 8{displaystyle R\$0, 40/R\$0, 50=0, 8} ). Como investidor externo, você pode usar essa informação para prever riscos em lucros potenciais. • Se a maior parte dos custos variáveis de uma empresa advir da produção, talvez haja um custo por unidade mais estável. Isso resulta em um lucro mais constante, desde que haja constância nas vendas. • ### Isso é verdade para grandes varejistas como Walmart e Casas Bahia. Seus custos fixos são relativamente baixos em comparação aos variáveis, o que representa uma grande proporção dos custos associados a cada venda • No entanto, uma empresa com proporção mais alta de custos fixos extrai mais vantagens da economia de escala (maior produção com menores custos por unidade). Isso acontece porque a renda aumenta muito mais rapidamente do que os gastos. • ### Por exemplo, uma empresa de programas de computador terá custos fixos associados ao desenvolvimento de produtos e ao sustento da equipe, mas poderá aumentar as vendas de programas sem grandes aumentos nos custos variáveis • Desse modo, quando houver uma queda das vendas, a empresa que teve muitos custos variáveis pode voltar à produção mais facilmente e ainda se manter lucrativa, enquanto outra, com grande proporção de custos fixos, terá que encontrar um meio de lidar com os elevados custos fixos por unidade. #### Step 3. Compare companies in the same industry Calculate the variable costs per unit and the total variable costs for a given company. Next, find data relating to the average variable cost of the sector in which it is located. This allows you to have a benchmark by which to judge the first company. Higher variable costs per unit can indicate that one company is less efficient than others, while a lower value can represent a competitive advantage. ### Public companies publish their financial statements publicly through their websites. Information regarding variable costs can be found by looking at the balance sheet of each one #### Step 4. Do break-even analysis Variable costs, when known, can be combined with fixed costs to find the break-even point of a new project. A manager can vary the quantity of units produced and thus estimate the fixed and variable costs for production at each step. This lets you know which level of the process, if there is more than one, is the most profitable. • For example, if the company plans to produce a new product that requires an initial investment of$100,000, you must know how much of that product to sell to offset the investment and generate a profit. This requires the sum of investment and other fixed costs with variables, in addition to subtracting them from income at various levels of production.
• You can calculate the equilibrium point with the formula Q=FP−v{displaystyle Q={frac {F}{P-v}}}

. nela, f e v representam, respectivamente, os custos fixos e variáveis por unidade, p representa o preço de venda do produto e q é a quantidade que indica o ponto de equilíbrio.

• por exemplo, se outros custos fixos ao longo da produção custarem r$50.000 (além dos r$ 100.000 originais, totalizando r$150.000 em custos fixos), os custos variáveis equivalerem a r$ 1, 00 por unidade e o produto tiver um preço de venda igual a r$4, 00 por unidade, você poderá calcular o ponto de equilíbrio descobrindo o valor de q=r$150.000r$4−r$1{displaystyle q={frac {r\$150.000}{r\$4-r\\$1}}}
• , resultando no total de 50.000 unidades.