Total cost

The total cost is the sum of the fixed costs, which do not depend on the quantity produced, and the variable costs, which do increase (or decrease) depending on the number of units manufactured.

Total cost

That is, the total cost is the sum of all the expenses of a company that are necessary to carry out its economic activity. This, regardless of whether or not they depend on the volume of production.

So, we can summarize the concept of total cost in the following equation:

CT = CV + CF

CT = CVU * Q + CF

Where:

  • CT: Total cost.
  • CVU: Unit variable cost or per unit produced.
  • Q: Quantity produced.
  • CF: Fixed costs.

It is important to calculate the total cost of the company because the profit generated by the business will depend on this. The higher the total cost, while maintaining the same level of income, the firm’s profits will be lower, and vice versa.

In other words, it is key that the company keeps its income above the total cost. That way, you will make a profit.

Total cost elements

The elements of the total cost are:

  • Fixed costs: These are all those that the company must incur, regardless of the number of units it produces. We refer, for example, to the payment for the rent of the office or for the machines for the operation of a factory.
  • Variable costs: They are those that vary according to the level produced. We refer, for example, to labor and inputs. The more you want to produce, the more employees must be hired and the more raw material must be purchased.

Total cost example

Let’s imagine that a textile company that manufactures pants has fixed costs of 10,000 euros. This, between renting the premises, payment of services and other expenses.

Likewise, the firm pays, on average, 35 euros to the workforce for each garment produced. In turn, you must spend 25 euros for the required supplies of each garment.

So, assuming that 200 units are manufactured per month, the total cost in that period would be:

CT = 10,000 + 35 * 200 + 25 * 200 = 22,000 euros