Cost Volume Formula
Cost volume formula is a cost accounting relation used to estimate production cost of a given number of units of a product. A linear cost volume formula is of the following form:
| y = a + bx |
In the above equation,
y stands for total production cost;
a for total fixed cost;
b for variable cost per unit; and
x for number of units
Total Fixed Cost is the sum of pure fixed cost, such as rent on factory building and property taxes; and the fixed component of mixed costs, such as total fixed cost on delivery trucks i.e. straight line depreciation expense.
Variable Cost per Unit is the sum of pure variable cost per unit, such as material cost per unit; and the variable component of mixed costs, such as variable cost per unit on delivery trucks i.e. fuel expense.
For this purpose, mixed costs are split into their fixed and variable components by using any of the following techniques:
The cost volume formula we discussed here is in the form of linear equation. Cost volume formulas can also be quadratic or other complex forms which are more accurate and thus suitable for practical use.
Example
Find total fixed cost, variable cost per unit, total cost of producing 30,000 units from the following cost volume formula:
y = $43,000 + 6x
Solution
Total Fixed Cost = $43,000
Variable Cost per Unit = $6
Total Cost of Producing 30,000 Units = $43,000 + 6 × 30,000 = $223,000
by Irfanullah Jan, ACCA and last modified on