Difference between Total Cost and Total Variable Cost

Understanding the difference between Total Cost and Total Variable Cost is crucial for effective cost management. Total Cost encompasses all expenses, including fixed and variable costs, while Total Variable Cost focuses specifically on the costs that vary with production levels. By grasping these distinctions, businesses can make informed decisions to optimize their operations and maximize profitability.

Understanding and effectively managing costs is crucial for businesses to achieve financial success and profitability. Total Cost and Total Variable Cost (TVC) are two fundamental concepts of accounting that play a vital role in cost analysis. While both terms relate to expenses, they differ significantly in their composition and implications for decision-making.

Total cost represents a company’s overall expenditure in producing goods or providing services. It encompasses fixed costs, which remain constant regardless of production levels, and variable costs, which fluctuate directly to output. On the other hand, total variable cost focuses solely on the expenses directly tied to production that vary with changes in output. Let’s understand the Total cost and Total variable cost difference.

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Table of Content

• Comparative Table: Total Cost and Total Variable Cost
• What is Total Cost?
• What is Total Variable Cost?
• Difference between Total Cost and Total Variable Cost

Comparative Table: Total Cost and Total Variable Cost

What is Total Cost?

Total cost refers to the sum of all expenses incurred by a company or organization in producing goods, providing services, or conducting business operations. It represents the overall expenditure required to carry out these activities. Total cost encompasses various types of costs, including both fixed costs and variable costs.

TC encompasses various types of costs, including both fixed and variable costs. Fixed costs are expenses that do not change with the level of production or sales. They remain constant regardless of the quantity of output. Fixed costs include rent, permanent staff salaries, insurance premiums, and equipment depreciation.

Variable costs are expenses that vary directly to the production or activity level. They increase or decrease as the volume of output changes. Examples of variable costs include raw materials, direct labour wages, energy consumption, packaging costs, and other expenses directly related to the production process.

Costs Involved in Total Cost

Example of Total Cost

A manufacturing company, XYZ Industries, has fixed costs of $10,000 per month (rent, salaries) and variable costs of $5 per unit produced (raw materials, labor). In a given month, they produce 1,000 units. The total fixed cost remains at $10,000, and the total variable cost is $5,000 (1,000 units x $5 per unit). Thus, that month’s total cost for XYZ Industries is $15,000 ($10,000 + $5,000).

What is Total Variable Cost?

Total variable cost is the cumulative sum of expenses directly associated with producing goods or services and varies with the output level. It represents the TC of the variable inputs used in production.

Variable costs change in proportion to the quantity of output or the activity level. As production increases, total variable costs rise; as production decreases, total variable costs decrease. This cost category includes expenses such as raw materials, direct labour wages, fuel or energy consumption, packaging costs, and other variable inputs directly tied to the production volume.

TVC is an essential measure for businesses to understand the cost structure of their operations. By analyzing total variable costs, companies can assess the impact of changes in production levels on their variable expenses. This information can be valuable for making decisions related to production planning, pricing strategies, and cost management, as it helps determine the cost behaviour associated with varying output levels.

Costs Involved in Variable Cost

Example of Total Variable Cost

Let’s consider a restaurant, ABC Bistro, that incurs variable operating costs. In a month, ABC Bistro serves 500 meals. The cost of ingredients per meal is $8, and the labour cost is $4. Therefore, the TVC for ABC Bistro is $6,000 ($8 per meal x 500 meals) + ($4 per meal x 500 meals). The TVC represents the cumulative expense directly related to the production of meals and fluctuates with the level of activity or the number of meals served.

Difference between Total Cost and Total Variable Cost

• Definition: TC refers to the overall cost incurred by a company to produce goods or provide services. Whereas, TVC represents the sum of costs that vary with the level of output or production.
• Composition: TC includes both fixed costs and variable costs. It includes costs directly related to producing goods or services that change with production levels. Fixed costs are expenses that do not change with the level of production or sales.TVC includes costs directly related to producing goods or services that change with production levels.
• Calculation: TC is calculated by summing up fixed and variable costs. TVC is calculated by summing up all the variable costs associated with production.
• Example: Rent, salaries of permanent staff, insurance, and depreciation of equipment are examples of fixed costs. Example: Raw materials, direct labour wages, packaging costs, and fuel or energy consumption are variable costs.

Conclusion

The main differences between total and variable costs are their composition and behaviour. TC includes both fixed and variable costs, remains relatively constant over a specific production level, and represents the overall cost of production. On the other hand, TVC includes only the costs that vary with production levels, fluctuate based on production volumes, and provide insights into the variable expenses associated with production.