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Variable Cost Explained with How to Calculate It

Writen by SATISH KUMAR

13 Jul, 2021

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variable cost

How much does it cost to produce a video? This question comes up quite often, especially when starting out. The answer depends on several factors, such as budget, equipment, and production time. In this article, we’ll explain variable costs and show you how to calculate them.

A video production company has a fixed overhead cost (rent, utilities, etc.) plus variable costs (equipment, talent, location, etc.). Variable costs are those that vary from project to project. For example, the amount of time it takes to shoot a video varies depending on the type of footage needed, whether or not a green screen is required, and other variables.

When calculating the total cost of producing a video, you should include both fixed and variable costs. Fixed costs are those that remain constant regardless of the number of units produced. These include things like rent, utilities, insurance, salaries, and marketing expenses. Variable costs are those that increase proportionally to the number of units produced, such as camera rentals, editing software, and talent fees.

How do you know what your variable costs will be for each project? You can use our free online calculator to estimate these costs. Once you have an idea of what they might be, you can compare them to your projected revenue to determine if the project makes sense financially. If you’re still unsure about whether or not it’s worth pursuing, check out our guide to making money as a freelance videographer.

You’ve probably heard the term “variable cost” thrown around in business circles. But what exactly is it? And why is it important to understand?

The concept of variable cost isn’t new, but it’s one that many people don’t fully grasp. To help you get started, here’s a quick explanation: Variable cost is the part of a product or service that increases as more units are sold. That means it’s the cost of something that goes up as the quantity of that thing increases.

For instance, let’s say you own a restaurant. Your food costs go up every day that you open for business because you need to buy ingredients and prepare meals. However, there are also certain items that stay the same no matter how many customers come through your doors. Those are called fixed costs. They include things like rent, electricity, insurance, and salaries.

If you want to make sure your business is profitable, you need to consider both fixed and variable costs when figuring out what kind of profit margin you need.

In order to figure out how much money you need to earn per hour, you first need to find out how much you spend per hour on labor. Then you take that number and divide it by the average hourly wage for your industry. Let’s look at an example.

Say you work 40 hours a week and you need to cover all of your expenses. You decide to charge $20 per hour for your services. So, you multiply 40 hours times $20 per hour equals $800. Now, you need to figure out how much you spend on labor.

To do this, you need to subtract any fixed costs that aren’t going up based on the number of hours worked. For example, let’s assume you pay $1,000 a month for rent. This means that even though you only work 40 hours a week, you still pay $400 a month ($1,000 divided by 52 weeks). Therefore, you’ll need to deduct $400 from $800 to calculate your variable cost. In this case, it would equal $300.

Now that you know how much you spend on variable costs, you can divide $300 by $20 to see how much you need to earn per job. In this case, you’d need to earn $15 per hour to break even.

So, now that we’ve figured out how much you need to make per hour, you need to add that to your base salary to arrive at your final income goal.

Let’s say you start off with an hourly rate of $10. Add $15 to that to account for variable costs. The result is $25 per hour. Divide that by 40 hours (the amount of time you typically work) to reach your desired weekly earnings. In this case, that comes out to $625 per week.

This may seem complicated, but once you learn how to calculate variable costs, you’ll be able to make better financial decisions.

How to Calculate Fixed Costs

Fixed costs are those that remain constant regardless of how many products or services you sell. These include things like utilities, insurance premiums, and taxes.

When calculating fixed costs, you need to determine how much each item will cost you in total over the course of a year. Once you have that information, you simply add them together to get your annual total.

Here’s an example. Say you run a small business that sells widgets. Each widget costs you $5 to produce. Over the course of a year, you expect to sell 100 widgets.

You need to figure out how many widgets you’re going to have to purchase in order to hit your sales target. If you plan to sell 100 widgets, then you need to purchase 100 widgets. But if you plan to sell 200 widgets, then you need two batches of 50 widgets instead of just one batch of 100 widgets.

Therefore, you need to add the cost of purchasing additional widgets to your total cost of goods sold.

In this case, you’ll need to purchase two batches of widgets. That means you’ll need to buy more than 100 widgets. To figure out how many widgets to buy, you can use the following formula:

100 widgets 2 batches of 50 widgets

Therefore, you need to purchase 150 widgets.

Once you have your total cost of goods, you can divide that number by the number of units you expect to sell to come up with the cost of each unit. In this case, the cost of each widget is $0.50.

Next, you need to add these numbers together to get your yearly total. Since you expect to sell 100 units, you’ll need to add $500 to your total cost of good sold.

The final step is to divide that number by 12 to find out what percentage of your revenue goes toward fixed costs. In this case, your fixed costs equal 10% of your revenue.

Now that you have calculated your fixed costs, you can divide your monthly expenses by your fixed costs to determine how much money you should save every month.

To do this, take your monthly expenses and divide them by your fixed costs. Then multiply that number by 1.2 to convert it into a decimal number.

For example, if your monthly expenses are $4,200 and your fixed costs are $3,600, then you’d divide $4,200 by $3,600 to get.8333. Multiply that by 1.2 to get.9167, which represents the savings you would see after converting your monthly expenses to a decimal number.

If you want to know how much money you could potentially save by cutting back on certain expenditures, try using the same method to calculate your savings.

Calculating Variable Costs

Variable costs change based on how many items you sell. They also vary depending on whether you’re selling physical products or digital downloads.

For example, let’s say you start off with a base price of $20. You charge an extra $5 for shipping. Your total product cost is therefore $25.

Your profit margin is 20%. Therefore, you earn $5 from each sale.

Your variable costs include any fees you pay to Amazon as well as the cost of packaging and shipping. The latter includes the cost of boxes, tape, labels, etc.

Next, you decide to increase your prices by 25 cents. This increases your total product cost to $35. However, since your profit margin remains at 20%, you still make $5 per sale.

However, you now have to pay $1.75 for the increased shipping fee. Therefore, your total cost has gone up to $7.75.

This new amount is subtracted from your gross profits. For example, if you had made $10 before increasing your prices, you now only make $6.25.

Conclusion

As you can see, calculating variable costs isn’t too difficult. All you need to do is keep track of your sales and subtract the variable costs from your gross income.

You may want to consider adding some additional information about variable costs in your business plan. If you don’t, you might not be able to convince investors to give you funding.

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