Cost Accounting - Explain about variable cost along with few situations where you would use variable cost .

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Explain about variable cost along with few situations where you would use variable cost .

Total Answers and Comments: 2

Last Update: August 18, 2008 Asked by: varghese

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June 12, 2008 02:00:01

ramm.30

Member Since: June 2008 Contribution: 1

RE: Explain about variable cost along with few situations where you would use variable cost .

variable cost varies with level of out put but the per unit cost of variable items is fixed.
eg: production of "x" no. of units where the cost varies with no. of units produced.

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August 17, 2008 22:41:51

vasudeo007

Member Since: July 2008 Contribution: 64

RE: Explain about variable cost along with few situations where you would use variable cost .

Costs are bifurcated into 2 Fixed cost and variable cost. In fact the third category also exist which is Semi variable cost.

Fixed costs are those costs which do not vary with the production level. Like rent of factory water bill (if water is not related to production) municipal bill etc are those items which are fixed. Whether you produce anything in factory or not you are going to incur this cost.

Variable cost are directly related to quantity of production. Say if you are producing match boxes then the costs related to chemicals wood card board boxes etc is directly proportional to quantity of output. That is called variable cost as it varies as production varies.

Variable cost and fixed cost are computed for the purpose of calculating break even point.
Example: say your fixed costs are Rs. 1 lakh per month. You are producing product "x" which costs Rs. 10 per unit variable cost.
Now how much should you produce of product "x" so as to cover fixed cost?

If you produce 100 quantity of product "x" in a month then:-
Fixed cost 1 00 000 + variable cost (100*10) Rs. 1 000/- total cost 1 01 000/-
so if you want to just cover your costs and not make any profits then you must sell your product at rs. 101000/100 quantity Rs. 1010/- per unit

Now if you produce 10 000 quantity of product "x" then:
Fixed cost Rs. 1 00 000/- + variable cost (10 000 * 10) 1 00 000/- total cost
Rs. 2 lakh.
so if you want to just cover your costs and not make any profits then you must sell this product at Rs. 2 00 000/10000 quantity Rs. 20/- per product

I think above example should cover your doubt. If it persists then write back me at vasudeo007@indiatimes.com

Vasudeo

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