Total Cost Formula- Definition
Total cost refers to the cost of production including both fixed and variable costs. By calculating total cost, e-commerce businesses can determine how to price their products in line to recover production cost and avoid losses.
Significance of Total Cost Formula in an E-Commerce Business
Some other benefits of using the total cost of production formula are;
- It helps the business set a pricing strategy for their products to recover production cost
- Helps businesses proactively modify cost when there’s a change in production costs increase
- It also identifies areas that can be modified to reduce the total cost by reducing the variable and fixed costs
- Helps in finances and setting sales and marketing targets.
Application of Total Cost Formula
Total cost formula factors in all the cost associated in producing an item that’s ready to go on sale on your e-commerce store. Know how you can use total cost formula for business below:
- The results can be used to review the product’s profitability rate
- While negotiating with suppliers, total costs give transparency by marking clear margins
- Helps businesses identify when they need to adjust the product cost, increase pricing or diversify to increase gains
Total Cost Formula
Total Cost =
Total Fixed Cost + Total Variable Cost
Or,
Total Cost =
Average Fixed Cost + Average Variable Cost x Number of Units
Or,
The average total cost formula is;
Average Total Cost =
Total Cost/ Number of Units
Definition of Each Element Used in the Total Cost Formula
To compute the average total cost formula, you will need:
- Fixed Cost
It refers to expenses which stay the same regardless of any change in the production units. We can understand it as the recurring expenses a business pays for production.
Examples are rent, insurance, office supplies, salaries of employees, and various other things.
- Variable Cost
Expenses made by businesses that can modify depending upon the units of production is known as variable cost.
How To Use the Total Cost Formula To Calculate a Business’ Turnover Ratio?
Let us assume a company has this information with it to calculate the business turnover ratio;
Total fixed cost = A$ 65,000
Average variable cost = A$5 per unit
Monthly production = 2000 units
The total cost of production = A$65,000+A$5 x 2000
=A$75,000
What Can You Infer From the Result of the Total Cost Formula?
The cost formula can give an overview of a specific product’s performance. It helps you analyze overall efficiency and areas where you can cut costs and maintain profitability. The Total cost is a useful metric that helps businesses determine the number of units to be sold in order to break even and make profits.