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Unit Variable cost Definition
Variable cost per unit refers to the costs of each unit of goods that a company produces, variable costs change as changes occur in the production level or activity level of the company. Unit Variable Cost is affected by changes in the business, extra cost is incurred when more units of goods are produced.
A Little More on What is Unit Variable Cost
Variable costs are costs incurred during the production of goods and services, these costs are directly affected by changes in the quantity of goods and services produced. Sales commission, raw materials, wages, utility bills, direct labor and few others are examples of variable costs.
Variable cost is different from fixed cost, this is because fixed cost does remain unchanged despite changes in the output of activity of the firm. In the case of variable cost, increase in the production cause an increase in variable cost while a decline in production level leads to a decrease in variable cost. Hence, variable cost fluctuates as changes occur in production output and activity.
The illustration below will aid a better understanding of variable cost per unit.
If a company that manufactures steel receives an order to
produce 5,000 pieces of steel for a construction company. Each piece of steel costs $60 that means 5,000 pieces of steel will cost $300, 000 (going by a normal calculation). The manufacturing company needs to know how much profit it would make from the sale, hence, it decides to know the total variable cost so that the gross profit can be determined.
If the manufacturing of steel that the company does is $500,000 annually and the cost of raw materials is $125,000 and direct labor cost $175,000. The variable cost will be calculated as:
Variable cost per unit = raw materials cost / total output + direct labor cost / total output
Variable cost per unit = $125,000/ $500,000 + $175,000 / $500,000 = 0.25+ 0.35 = 0.6
References for “Unit Variable Cost”
Academic research for “Unit Variable Cost”
Capacity Utilization and Unit Variable Cost: Evidence from California Hospitals, Balakrishnan, R., & Soderstrom, N. (2006). Capacity Utilization and Unit Variable Cost: Evidence from California Hospitals. Working paper, The University of Iowa and University of Colorado.
Inventory management with variable lead-time dependent procurement cost, Chandra, C., & Grabis, J. (2008). Inventory management with variable lead-time dependent procurement cost. Omega, 36(5), 877-887.
Integrated vendor–buyer cooperative inventory models with controllable lead time and ordering cost reduction, Chang, H. C., Ouyang, L. Y., Wu, K. S., & Ho, C. H. (2006). Integrated vendor–buyer cooperative inventory models with controllable lead time and ordering cost reduction. European Journal of Operational Research, 170(2), 481-495.
A general decision model for cost-volume-profit analysis under uncertainty, Shih, W. (1979). A general decision model for cost-volume-profit analysis under uncertainty. Accounting Review, 687-706.
Model sampling: A stochastic cost-volume-profit analysis, Liao, M. (1975). Model sampling: A stochastic cost-volume-profit analysis. The Accounting Review, 50(4), 780-790.
Modelling quality-cost dynamics, Burgess, T. F. (1996). Modelling quality-cost dynamics. International Journal of Quality & Reliability Management, 13(3), 8-26.