- How to Calculate the Operating Breakeven Point
- Difference Between the Straight Line Method of Depreciation and Unit of Production
- Cost Estimation Methods in Accounting
- What Are the Advantages of a Simple Moving Average Over an Exponential Moving Average?
- What Is the Formula for Calculating the Marginal Product?
- How to Find the Total Variable Costs in Accounting
Output, fixed costs and variable costs are commonly used to determine the price of a product as well as the required output for a company for a given time. Fixed costs (FC) consist of all any cost that remains the same regardless of the amount of product produced. These include expenses such as rent. Variable costs are those costs which may change depending on the amount of product produced. For example, a bakery will pay the same rent each month regardless of how much pastry it produces. However, the cost of ingredients such as flour, or the cost of electricity used to bake the pastries, will change depending on how much pastry is baked in a given period. Fixed costs do not change if output changes, but variable costs do.
Identify a known output. In order to produce the output of fixed cost and variable cost, you must first know the output of a given total cost. For example, you must first know that the total cost of producing 100 pastries per day is equal to $240 before you may produce a calculation of the forecasted output for a different total cost. In other words, you must first have at least one known output number before you can forecast the expected output of varying total cost amounts. This may be accomplished by calculating the total cost to produce 100 pastries per day.
Calculate the average total cost (ATC) per unit of output. Use the equation, ATC = TC / Q, in which the average total cost is equal to the total cost divided by the quantity. Using the bakery example, the average total cost to produce one pastry is equal to the total cost of $240 divided by 100 pastries. The ATC equals $2.40. In other words, if the bakery produces 100 pastries per day, then it costs the bakery an average of $2.40 to produce each pastry.
Produce the output of a fixed cost and a different variable cost. The bakery owner may need this information if he is considering expanding operations to meet a growing demand for his pastries. Because variable costs will change when quantity changes, the average total cost will also change. In such case, the baker may need to raise the price of his pastries to cover an increase in costs, or he may be able to lower the price if the ATC declines. To do this, calculate the output using the equation, Q = TC / ATC, in which Q is the quantity or output. To produce the output, you must divide the total cost by the average total cost.