01 Jun Total Cost
What is Total Cost?
Definition: From an accounting perspective, total costs refer to the sum of fixed costs and variable costs. If there are any semi-variable costs, these would have to be added as well to arrive at the figure of total costs.
When calculating total investment costs, you have to add the cost of the investment itself and include any costs associated with the investment. All fees, commission, and other transaction costs would also have to be taken into consideration.
What does Total Cost mean?
Total costs include both fixed and variable costs. While fixed costs remain constant with the level of production, variable costs increase when additional units are produced. The following graph illustrates this point:
Variable costs rise with an increase in the level of production. If a greater volume of goods is to be manufactured, the requirement for raw materials will go up. It will also be necessary to purchase more production supplies. Variable costs could also take the form of packaging materials. The company may also have to increase the number of workers who are employed on a piece rate basis.
A company’s fixed costs include the depreciation charged on machinery, insurance expenses, the interest that the company pays for the loans that it has taken, and property taxes. These remain constant regardless of the level of production.
Example of Total Cost
Goodearth Industries is a manufacturer of cardboard boxes. The company incurs the following costs to manufacture and sell 100,000 boxes:
Fixed manufacturing costs = $250,000
Variable manufacturing costs = $650,000
Selling and administrative costs = $100,000
Total costs = $1,000,000 ($250,000 + $650,000 + $100,000)
Average cost per box = $10 ($1,000,000 divided by 100,000)
Goodearth sells the boxes that it manufactures at a markup of 25%. Calculating its total costs allows the company to arrive at its selling price of $12.50 per box. ($10 + 25% of $10).
Total costs include all the costs associated with producing a good.