Question

how do i calculate variable cost of goods sold inventory

Answer 1

To calculate the variable cost of goods sold (COGS) related to inventory, you need to focus primarily on the costs that fluctuate with production volume and exclude fixed costs such as salaries of permanent staff, rent, and other overhead expenses that do not change with production levels. Here's a step-by-step approach:

### Step 1: Identify Variable Costs
Variable costs typically include:
- Direct materials: raw materials that are directly used in the creation of the product.
- Direct labor: wages of workers who are directly involved in manufacturing the product.
- Variable manufacturing overhead: costs that vary with production, such as utilities for the factory, packaging supplies, and certain types of production supplies.

### Step 2: Gather Data
Collect data on the following:
- Total direct materials cost
- Total direct labor cost
- Total variable manufacturing overhead
- Any additional variable costs associated with the production of the goods sold.

### Step 3: Calculate Total Variable Costs for the Period
Sum the variable costs identified in the previous step for the accounting period you're analyzing:

\[
\text{Total Variable Costs} = \text{Direct Materials} + \text{Direct Labor} + \text{Variable Manufacturing Overhead}
\]

### Step 4: Calculate Variable Cost Per Unit
If you produced multiple units, calculate the variable cost per unit:

\[
\text{Variable Cost Per Unit} = \frac{\text{Total Variable Costs}}{\text{Total Units Produced}}
\]

### Step 5: Calculate Variable COGS
To calculate variable COGS, you need to determine how many units of inventory were sold during the period. Multiply the variable cost per unit by the number of units sold:

\[
\text{Variable COGS} = \text{Variable Cost Per Unit} \times \text{Units Sold}
\]

### Example Calculation
Let’s say you have the following costs for a period:
- Direct materials: $10,000
- Direct labor: $5,000
- Variable manufacturing overhead: $2,000
- Total units produced: 1,000
- Units sold during the period: 800

#### Total Variable Costs:
\[
\text{Total Variable Costs} = 10,000 + 5,000 + 2,000 = 17,000
\]

#### Variable Cost Per Unit:
\[
\text{Variable Cost Per Unit} = \frac{17,000}{1,000} = 17
\]

#### Variable COGS:
\[
\text{Variable COGS} = 17 \times 800 = 13,600
\]

### Conclusion
The variable cost of goods sold for the period is $13,600 based on the example provided. This approach helps isolate the costs that fluctuate with production and can aid in decision-making related to pricing, profitability, and cost management.