A total cost is a sum of expenses a company needs to manufacture a specific level of output. It’s a total of fixed and variable costs, which helps product managers evaluate the overall profit margin.
To realize that their companies are running smoothly, business owners should possess information about profits and expenses. Total cost gives entrepreneurs an understanding of a firm’s profitability and performance. In this article, we’ll reveal several steps necessary to calculate the total cost and discuss an example.
How to Calculate the Total Cost?
Different types of businesses leverage the formula to evaluate overall profit margin. If a firm doesn’t bring the expected revenue, it’s for an owner to decide whether to make any changes to turnover or pricing. So if you need to obtain the measure, let’s review four steps to calculate it for your company.
- Sum up all fixed costs. First of all, you need to find out the fixed costs of your company. These are business expenses that aren’t influenced by the number of manufactured products or services. They include machinery, property taxes, equipment, rental lease payments, etc. Once you know your fixed costs, sum them all up.
- Find all variable costs. The next step is to figure out the variable costs. These refer to expenses influenced by the number of products produced by a certain company. Expenses on raw materials, utility costs, packaging, wages, and commissions are examples of variable costs. So, you need to obtain a total of these expenses.
- Add all fixed and variable costs to define the total cost. Once you have all the fixed and variable costs, you can estimate the total cost. Add all expenses to obtain the total cost.
- Check the income statement to find the business’ costs. Financial documents contain records about the performance of a certain company and its business activities. That’s why sometimes it’s useful to check an income statement to find information on the costs of a business. Besides the income statement that nearly every company has, you might need to consult a balance sheet (to check your company’s financial health).
Now when you know the necessary steps to calculate the total cost, let’s proceed to the example.
Total Cost Example
Businesses use the formula to obtain a metric that enables them to assess profitability. To figure out whether a firm needs to boost sales, review pricing, or generate more revenue, business owners compare total costs at different time intervals.
Let’s imagine that there’s an apparel company. The owner of the business needs to calculate the total cost to find out whether the firm brings any profit. For this purpose, there is a necessity to obtain all fixed costs of this business. You can see them below.
The second step is to find all variable costs and sum them up.
So now when you have the necessary measures, you can easily estimate the total cost by simply adding all of the expenses.
So, total cost helps entrepreneurs define the profitability of their companies. Taking this metric into account also helps assess a company's performance and determine its position in the market compared to competitors. The results can be used to review how successful a particular product or product range is.
- This article defines the term, reveals how total cost works, and covers its advantages and disadvantages.
- This article provides readers with a definition and formula.
- This article contains information about the difference between fixed cost, total fixed cost, and variable cost.
Last Updated: 18.05.2021