Definition: Variable cost per unit is the production cost for each unit produced that is affected by changes in a firm’s output or activity level. Unlike fixed costs, these costs vary when production levels increase or decrease.
What Does Variable Cost per Unit Mean?
What is the definition of variable cost per unit? Variable costs are costs which are directly related to the changes in the quantity of output; therefore, variable costs increase when production grows, and decline when production contracts. Common examples of variable costs in a firm are raw materials, wages, utilities, sales commissions, production taxes, and direct labor, among others. The variable cost does not always change at the same rate that labor does.
Instead, sometimes it fluctuates more rapidly, often it fluctuates at a lower rate, and sometimes it fluctuates at the same rate to labor. The total variable cost increases and decreases based on the activity level, but the variable cost per unit remains constant with respect to the activity level.
Let’s look at an example.
Example
Company ABC received an order to deliver 3,000 packaging items to another firm for a total sales price of $125,000. The management wants to calculate the gross profit for this order by determining first the total variable cost.
The company’s annual production is 142,300 packaging items. The management has determined that the cost of raw materials is $12,000 and the direct labor costs are $65,200. Therefore, the variable cost per unit is:
Variable cost per unit = raw materials cost / total output + direct labor cost / total output = $12,000 / 142,300 + $65,200 / 142,300 = $0.08 + $0.46 = $0.54
The total variable cost is 142,300 x $0.54 = $77,200
Therefore, if the company undertakes the order of 3,000 packaging items, it will realize a gross profit of:
Gross profit = sales price – total variable cost = $125,000 – $77,200 = $47,800
Summary Definition
Define Variable Cost Per Unit: Manufacturing expenses incurred to produce a single unit that vary directly with the overall level of production.
